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European Stocks Roar
As Euro Makes Winning Debut

By Huw Jones  Reuters
LONDON — European stocks took a flying leap into the new year on Monday as the region's infant euro currency was launched successfully on the world's financial markets.

"There is some euro impact going on after people were reluctant to hold open positions over the euro conversion period," said Ian Scott, European equity strategist at Lehman Brothers.

"The other point of note is this rally has occurred despite a move up in the euro/dollar exchange rate," Scott said. "One would usually look at the appreciation of a European currency against the dollar as not good news for the European market."

The euro closed in Europe at $1.18, up from about $1.17 when it started trading in Sydney.

Shares in Germany, whose Deutschemark currency formed the bedrock of the euro, sprinted to four-month highs, while blue chips in France, Spain and Italy were up more than 5 percent.

But London, Europe's biggest stock trading center and outside the euro-zone, fell behind as cash flowed into euroland blue chips with telecoms leading the charge.

The Dow Jones pan-European STOXX index rose 3 percent to close at 287.81. The FTSE Eurotop 300 index gained 2.6 percent to end at 1214.04.

The narrower Dow Jones Euro STOXX 50 index of 50 euro-zone blue chips jumped six percent, reflecting the big cap dominance of the first day of stock trading in 1999.

More gains should be in store for European stocks.

"International money flows will increasingly go to the euro zone," said Stefan Casteleyn, chief analyst at Bank Corluy in Antwerp.

But if the euro became too strong against the dollar in the longer term, it could dent overseas earnings of European companies, Casteleyn added.

Morgan Stanley Dean Witter said on Monday it raised the weighting of equities in its model European investment portfolio by two percent to 62 percent at the expense of cash.

The securities house said leading euro-zone stock markets will outperform in the first half of 1999 as investments funds struggle to make up their underweight positions in euro shares.

Lehman's Scott said European shares were still attractive.

"Standing back from today's move, we feel these markets are undervalued relative to bond yields which have fallen," Scott said.

Others also expected further gains, particularly in the big caps.

"Some foreign investors may be waiting for the euro to arrive before switching assets from dollar or yen-based holdings," said Mark Howdle, European portfolio strategist at Salomon Smith Barney in a research note.

"A two-tier market could develop in which the Euro-STOXX 50 universe could become a "nifty-fifty" with valuation levels detaching from the rest of the market, similar to the recent pattern in the US market," Howdle added.

Telecom stocks were the star performers.

"Telecom has definitely been a sector very much in vogue and several of these stocks are very heavily weighted in the European indices and have restricted free floats," Scott said.

Shares in France Telecom rose 8 percent to close at 73.3 euros. Germany's Deutsche Telekom jumped more than 10 percent to close at 31.80 euros.

"I think it is related to the euro and that comes from fund managers re-adjusting their portfolios to reflect sector allocation," said Michel Bon, chairman of France Telecom.

"Before they had some lines along sectors and some along countries. From now on they have no reason to keep country allocations in the euro zone and I think they are increasing the allocation to the telecoms sector," he said.

A successful euro should also spur consolidation among exchanges.

Olivier Lefebvre, chairman of the Brussels bourse — where shares ended at a record high, said the new currency made it even more inevitable that European exchanges would link up.

"The creation of the euro will put additional pressure on European exchanges to merge under a single platform," Lefebvre said.

However, the new London Stock Exchange and Deutsche Boerse alliance, launched with great fanfare last summer as the first step towards a pan-European stock market, got off to a muted start on its first day of trading on Monday when the euro stole the spotlight.

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