The restraints of monetary union will force people to seek new ways to save

By IAN COWIE

here is an old and simple rule about getting rich: Buy low; sell high. With the European stock markets soaring to stratospheric heights there are plenty of sharp-eyed investors who, having bought low at the start of the rise in early 1995, now stand to get rich. And plenty more punters are buying into what has become the Cult of Equity. It remains to be seen whether they, too, will ride the rise--or turn out to be high-buyers whose investments will dwindle when the high-sellers perform the second half of the get-rich formula. It is a risky way to treat a nest egg, but many new European equity buyers believe they have no choice but to find ways to save harder--if they don't provide for their old age now, nobody else will. As most of the European Union prepares to squeeze into the fiscal corset of monetary union, efforts to bring government spending into line with revenues are forcing more individuals to fund Do-It-Yourself welfare states.

Those who have already taken the plunge into shares have been well rewarded for accepting the risk. Foreign & Colonial Eurotrust, a $530 million investment trust, has seen its share price soar by 57% in the last year. Its manager, Stephen White, said: "We have had a fantastic run for three reasons; interest rates have fallen across the Continent; the strength of the dollar and pound has helped Continental exporters; and corporate restructuring in anticipation of monetary union has stimulated markets. We expect cross-border mergers and consolidation to continue in banking and pharmaceuticals and are overweight in countries where interest rates have fallen most sharply: Italy, Spain and Portugal."

According to statisticians Standard & Poors Micropal, the average unit trust investing in Continental Europe has grown by more than 35% in the last year and turning $1,000 into $2,500 over the last five years. INVESCO European Fund--a $585 million open-ended fund, similar to the American mutual funds--is leader of the pack over the last three years. Its manager, Rory Powe, says he looks for firms with a strong position in markets which are growing rapidly: "So, for example, we hold Telecom Italia Mobile, the largest mobile phone operator in Italy where only 20% of the population has them, compared to 40% in Finland. Penetration is even lower in Germany, where we have a stake in Mannesmann, the second-largest operator."

Even so, direct investment in foreign shares or equities is impractical for most individual investors because high costs are compounded by currency risk. The banks' minimum exchange fees mean many dividend checks denominated in foreign currencies are simply not worth cashing. Similarly, paper profits in a foreign currency might be wiped out if the exchange rate moves against them. Even after monetary union has eliminated currency risk and reduced dealing costs, direct equity investment on foreign exchanges will remain a high risk option.

Daniel Godfrey, a director of Robert Fleming Save & Prosper, whose unit and investment trusts hold over $1.2 billion of assets on the Continent, said: "Pooled funds offer investors of all sizes access to an international network of research and analysis, as well as the ability to spread risk across a wide range of individual shares. We like banking and insurance stocks because the urge to merge is pushing up prices, and economic recovery in Europe is boosting profits. We are particularly keen on Italy and Spain. Last month $19 billion was invested in unit trusts in Italy--as much as the inflow that month in America."

That theme was taken up by Marc Sylvain, managing director of Fidelity Investments (Europe), part of the world's largest mutual fund manager. He said: "Even the most risk-averse saver is likely to ask himself why they are still accepting 3% per annum from deposits, or perhaps a little more than that from bonds, when many Continental bourses have risen by 30% over the last year."

The worry remains that there are no profits to be made today from buying into yesterday's success story; the fact that share prices have risen in the past does not preclude them from falling in future. But Sylvain contends that the lesson of stockmarket history is that equities' medium to long-term returns justify the short-term risk of their volatility. Bonds and deposits should only be considered for short-term, "rainy day" saving.

That view is borne out by analysis by Barclays Capital of returns from equities, bonds and deposits over the last three quarters of a century. Over dozens of five-year periods, shares generated the greatest returns 83% of the time. And when the investment period is lengthened to a decade, shares did best 97% of the time.

Taking a much shorter-term view, although the FTSE 100 Index of Britain's hundred largest shares fell by nearly 30% from peak to trough in 1987, it actually finished that calendar year marginally higher than it started. So the message for medium- to long-term savers is clear: provided they can avoid being panicked into selling in the immediate aftermath of a crash, share-based pooled funds are likely to provide the best foundation for a Do-It-Yourself welfare state.

Ian Cowie is personal finance editor of Britain's Daily Telegraph