[A-List] US economy: flight to European quality?

["Michael Keaney" <michael.keaney@xxxxxx>]

US investors learn to look towards Europe
By Deborah Hargreaves in London
Financial Times, October 21 2002

Are large US institutional investors turning to European stocks as a refuge
from the corporate scandals in their own market?

Brunswick, the financial public relations company, has surveyed US investors
with holdings of at least $500m (E514m) in European stocks. It found what it
describes as one of the biggest shifts in investor attitudes to European
companies opinion since its report was first published in 1998.

European managers were once seen as unimaginative and lacking in
entrepreneurial flair, but this is now seen as an advantage. However, US
investors stressed the need for Europe to improve disclosure to shareholders
and wanted face-to-face meetings.

"While disclosure in Europe is seen as equally bad as in the US, investors
view European companies as a little more inherently honest -- not because
they are better human beings but because they weren't carried away by the
cycle of exuberance and greed," says Bill Gross of Pimco, the world's
biggest bond investor.

Nevertheless, Michael Schoeck, head of active equities at State Street
Global Advisors in Boston, which with $770bn under management is the world's
biggest institutional fund manager, sounds a note of caution.

He said that from 1994 to June this year, US stocks had "whipped" European
shares, outperforming them by 60 per cent. He is also sceptical whether
diversifying into Europe works, noting that investors can gain global
exposure through multinational companies based in the US.

The UK continues to attract the lion's share of US investment in Europe --
80 per cent by value -- but investors did highlight the importance of the
euro in their decision to buy stocks. In February, the euro had barely
registered on US investors' radar screens, but by August, 36 per cent of
respondents believed a stronger euro was a reason to buy European equities.

That did not stop investors from pulling away slightly from France and
Germany, although the Netherlands and Switzerland benefitted from a general
flight to quality. The proportion of Swiss equities held by the sample of
investors rose from 9 per cent last year to 12.4 per cent, putting it level
with France.

US investors cut back UK holdings after September 11 last year to a level of
about 25 per cent, but have since increased their exposure to 27.4 per
cent -- the highest for three years.

Another surprise finding is US investors' disdain for their domestic
generally accepted accounting principles. Just over 70 per cent of US
investors said they found Europe's International Accounting Standards
offered better disclosure, with 42 per cent opting for GAAP. However, 89 per
cent said a strong balance sheet was important.

US investors have  also increased exposure to emerging markets such as
Russia and are investing more in Poland, the Czech Republic and Hungary
ahead of European Union enlargement.

Interestingly, US investors' views on the European Commission have changed.
Last year with several vetoes of big US mergers on their minds, investors
were not so concerned about Brussels' powers in competition policy. They saw
it as a force for greater shareholder value, overriding national governments
on issues such as golden shares.

The research was carried out in August among 72 analysts and portfolio
managers at 54 institutions, accounting for $674bn in European equities.