Industries And Stocks Within A Country example essay topic

What's more, disagreements over Iraq underscored the political strains among European countries. UBS Warburg's Mr. Ions adds that problems at French conglomerate Vivendi Universal, U.K. telecom-equipment maker Marconi, Anglo-Dutch steel company Corus and German banks highlighted the importance of European countries' individual accounting, corporate governance and legal standards. He also points out that, despite globalization, the largest chunk of European companies's ales and costs are in their home market and that a majority of their shareholders are domestically based. For a while, the theory worked: From early 1998 through most of 2002, sectors steadily grew in importance. They became "roughly twice as important as country membership in explaining European equity performance", says Alex Ions, a European equity strategist at UBS Warburg in London.

But late last year, the country effect began to make a comeback. In the euro zone, policies designed to foster convergence instead led to divergent growth and inflation rates among member countries. While the difference in returns between various sectors narrowed, that between countries widened. Noting that the Irish stock market is up 11% this year, while Dutch stocks are down 12%, Niall MacLeod, a European equity strategist at Citigroup Smith Barney, says that getting country bets right this year has been more important than getting sector calls right.

"Country differences matter big time", says Dresdner's Ms. After several years in which sector factors were the driving forces behind stock prices, country considerations are reasserting their influence -- things like monetary and fiscal policy, accounting practices, tax rates, the role of majority shareholders and government-owned industrial stakes". Global sectors are important, but boundaries are back", says Avi nash Persaud, global head of market research at State Street in London. Focusing on sectors such as new technology is the correct approach for investing in bull markets. But, says Mr. Persaud, "bear markets are all about countries and policy". The country vs. sector debate is no esoteric discussion reserved for business schools. Whether you allocate investments by leaning toward a country-by-country basis or a sector-by-sector basis can have big effects on your equity returns.

Until the late 1990's, stock investing was mostly a top-down process: Assets were first allocated to different countries; step two involved selecting industries and stocks within a country. In Europe, "company analysis was done on a country basis", says Karen Olney, equity strategist at Dresdner Klein wort Wasserstein in London. Europe's economic and monetary union changed that. With the introduction of a common currency, single monetary policy and budget-deficit ceilings, convergence became the name of the game. The economies of the initial 11 -- and later 12 -- member nations would march in lock step. Or so the theory went.

With receding differences between individual countries, money managers and analysts began treating the euro zone -- and, in many instances, all of Europe -- as a single entity, just as they did the U.S. The emphasis was on industry sectors, not countries. Meanwhile, academic studies, noting that many companies were increasingly global (both in ownership and sales), contended a corporation's international activities were as important in pricing its shares as where it was based. "Country differences matter big time", says Dresdner's Ms. Olney. What happened? For one, there was distressed selling by European insurance companies, with Dutch and German insurers leading the way in reducing their equity holdings. Ahold's accounting scandals represented a double whammy for the Dutch market, when collateral damage spread to the country's banks and insurers.

In part, the increase in country influence also reflects reduced sector importance. "Sectors aren't moving around as much, because investors are more nervous about market direction than normally", says Citigroup's Mr. MacLeod. And when institutions pare their equity holdings, "It's not a case of fund managers saying 'I want to reduce my portfolio, and I'll sell some banks,' " he says. "More recently, it's been them selling the whole market". Mr. Ions examined 16 European countries, using 11 economic, investment and political measures. His conclusion: "There is no 'risk-free' country, nor is there a 'toxic' market that scores poorly on all criteria".

Nonetheless, in the short term, he advises reducing investments in the "highest-risk" countries, including, Germany, France, Italy, Portugal and Austria. Looking a lot less risky are the U.K., Netherlands, Ireland and Finland. Over at Dresdner, strategists recommend that investors be "very overweight" in the U.K., Spain and Portugal (because of a preference for Portugal Telecom); and overweight Italy and Norway. In contrast, they advise being underweight Switzerland, Germany, Sweden and Ireland and very underweight France.

Will national factors ever reign supreme again? Probably not -- unless EMU collapses. Now there's a thought.