EMU and the Asset Allocation Decision

KENNETH F. KRONER is managing director responsible for research on asset allocation strategies for Barclays Global Investors. He has taught economics and finance at the University of Arizona. He holds a Ph.D. in economics from the University of California at San Diego. T he European Economic and Ž . Monetary Union EMU promises to create a single economic entity that rivals the size and economic might of the United States. On January 1, 1999, eleven European countries ceded control over their monetary policies to a single central bank the European Central Bank and now share a common interest rate structure, a common monetary policy, and a common currency Ž . the euro . Such convergence will unleash new forces that will influence the way investors evaluate stocks and bonds in Europe. We summarize here our research on the likely impact of these forces, with special attention to their effect on the asset allocation decision and on proposed profit opportunities. We start by summarizing the coming investment landscape, including the new monetary and fiscal policy environments. One of the implications of this new landscape is that country-based allocation strategies should continue to be very important, contrary to much of the conventional wisdom. Some EMU-based profit opportunities that have been proposed, however, are less likely to add value than has been suggested.