Paris gets a new cuisine

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French brokers, like those in other single-currency zone countries, are gradually adapting to a pan-European market. While investors are holding on to domestic equities, they are also boosting portfolios with other European stocks.
"The French equity market has been outperforming Europe since 1997, so there has been no incentive for domestic investors to sell French stocks," says Philippe Legrand, head of pan European equity sales at SG Global Equities. "But they have been adjusting their portfolios with regular movement of new inflows into non-French equities."
There has also been a general shift into equities from other asset classes. Ten years ago, mutual funds in France had only 10% of their total assets in equities, with 60% to 70% of that invested domestically. By 1999, equities had grown to one-third of total mutual fund assets, of which more than 60% is non-French. So the proportion of total funds dedicated to non-French equities has risen from 3% to just less than 20%.
That shift should continue. European rules limiting pension fund investments to 10% in any single exposure present a challenge to funds that follow national stock market indices. The Vodafone/Mannesmann combine, Ericsson, Telefónica and Deutsche Telekom each account for more than 10% of their national market indices. In France, France Télécom accounts for 12% of the CAC40 index.

To keep up with customers' moves into foreign stocks, brokers have had to build European research. Even firms little known outside France, such as Exane, an independent institutional brokerage and research outfit employing 270 people and concentrating on secondary markets - particularly small and mid-cap stocks - has had to follow its clients across borders. Exane claims that of the 250 stocks it follows, one-third are non-French. The group is recruiting more analysts to extend European coverage. It's a huge investment for a firm that derives no earnings from lucrative lead management positions in new issues.
The larger brokerages attached to leading French banks are taking the same leap. Christopher Potts, head of economics and strategy at Crédit Agricole Indosuez Cheuvreux, says: "Brokers have to adapt to a sea change in the industry. A lot of the traditional distinctions and stereotypes are becoming less relevant, such as that between the global equity firms and the local brokers. Any brokerage firm of size must know that, if it remains a local broker within Europe, it has no future. Many local players are building a European capacity. The only remaining question is what strategy you take to do so."
Cheuvreux, a merger of Crédit Agricole's three French brokerage firms - Cheuvreux de Virieu, Dynabourse and Hayaux du Tilly - exemplifies this trend. It has doubled its number of analysts to 90 in two years and expects to double that again in the next two years. It has hired local teams across Europe, allowing it to cover euroland stocks from the bottom up. In the past two years it has recruited teams in Germany, Scandinavia and Switzerland to complement earlier build-ups in Spain and Italy.
"Our clients tell us that they like our proximity to the companies," says Potts. "It's tough to get close to a Swedish company and organize personal visits for your investing clients, without local people in Stockholm who have covered those companies for many years." The group now covers nearly 1,000 stocks across Europe and has ambitions on the UK.
The firm's total staff has grown from 200 people, mainly in Paris, in mid-1997, to more than 500 across Europe. Potts says that more than 50% of commissions at the firm, which does not lead new equity issues, come from outside France.
"The only way you can cover Europe is on a specialist basis," argues an executive at another French broker. "The characteristic of Europe is its diversity. You can't just cover it out of London or Paris and the French firms which try to do that will struggle.
"The first move for the traditional French fund manager who used to look just at Paris bourse stocks will be into the top euro 50 stocks. The fund manager will still want to talk in French to a French salesman and receive research written in French. But eventually that fund manager will want to look deeper into European stock markets, to the next 250 stocks by market capitalization and, at some stage, the French salesman will have to hand him over to the specialist German analyst in Frankfurt."
Increasingly, competition will pit medium-size French brokers against other large and medium-size European firms. One French broker says competitors now include the likes of Swiss firm Julius Baer, as well as the large US firms that have dominated primary equity markets in Europe and are now building selectively in local secondary markets. One French broker complains: "While many investors will deal with the global firms because they need access to new issues, some of their secondary market coverage out of London is a little superficial."
Beyond Europe there's global coverage to consider. At SG Global Equities, chief operating officer Frédéric Oudéa says that the firm produces global coverage in technology and healthcare, reinforced by SG Cowen, the US broker it acquired in 1998. "We believe that more and more customers will want a sectoral approach," he says. However, he distinguishes between different French customers. "Between the fund managers at the likes of Axa and CDC Asset Management and those at the smaller institutions, there is still a huge gap. And while the largest customers are already up to speed in terms of a sectoral approach, many others still take a local view."
Pan-European build-ups are being financed by a bull market. It remains to be seen how these firms will fare in a downturn. "Obviously the markets have been very strong in the first quarter of 2000, but events since the start of April have shown that you cannot always rely on that," says Oudéa. "Over the long run, only a few firms will be able to build strong sectoral coverage on a European or worldwide basis. Others may find it better to take a national approach covering smaller customers."

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