European Equities: The great equity rebalancing act
On the first working day of January 1999 big institutional investors throughout euroland will wake up to find that they are no longer limited to holding domestic equities. But how do you go about swapping a national stock portfolio for an Emu-wide one? You can't just call your broker and sell half your portfolio. There are derivatives - options on pan-European indices, equity swaps and reverse convertibles - that can provide exposure quickly and simply. Or you can speak to the specialist portfolio traders - the guys who have quietly spent the last couple of years installing computer systems to process huge order volumes.
For almost a year, European equity brokers have been swapping theories about the prospects for a great rebalancing of share portfolios across Europe. Former domestic investors, once constrained by currency-matching rules to buying stocks listed in their own countries , are now liberalized by the euro and are seeking pan-European exposure. In the first half of 1998, equity strategists endlessly discussed the likely winners and losers by country and sector. Many predicted a huge flow through Europe's equity markets in the first months and years of the single currency, running to many hundreds of billions of dollars-worth of stock.
As the launch of the euro has approached, some brokers have been disappointed to see less activity than expected. They have blamed the natural inertia of pension-plan sponsors, their actuaries, consultants and fund managers. They have bemoaned the uncertainty and confusion over which of the many competing benchmarks investors will adopt for performance measurement in the new single-currency European equity market. They have cited the unprecedented scale of the challenge for asset holders in discarding domestic portfolios outright and seeking new multinational ones. They have pondered the various ways investors might choose to make this leap.