This is shown in a study by the economist Maher Asal at University West in Sweden. Previous research provides overwhelming evidence that diversifying across countries in a stock portfolio is more lucrative than diversifying by sector. But it has been unclear what is really the case in the euro area. Now Maher Asal has managed to show that investors in the euro area succeed best with stock portfolios containing a balance of shares in different sectors.
Member states in the euro area pursue a joint monetary policy and have a joint exchange rate. However, fiscal policies remain largely domestic matters in the separate countries. The spread of economic troubles in one euro country to other euro countries has been a recurrent theme in news reports recently. What Maher Asal has studied is the impact of the currency union on the stock market. The euro was introduced in 1999, and the study covers the years 1992-2009. Asal compares the periods before and after the introduction of the euro.
“In the pre-euro days stock markets were segmented, so risk-adjusted yields could be realized by diversifying across countries. Now industrial sectors appear segmented instead, owing to differences in taxes and regulations. The sectors are different in character,” says Maher Asal.
Within the euro area currency risks have been eliminated, and interest levels and inflation in the different countries have been leveled. On the other hand, differences between industries have not been evened out. Industrial policies differ for the various industrial sectors. This has consequences for how much is invested in research and development, for example, and how mergers, acquisitions, and bankruptcies are dealt with.
Maher Asal’s study covers 19 sectors, and the results show that shares from three of them are especially important to have in a wisely composed stock portfolio. The three sectors are construction, chemicals, and raw materials, such as forestry and mining. Maher Asal’s findings are based on econometric analyses of more than100 000 observations in databases containing information about share prices, etc.
Reference: The Impact of the Euro on Sectoral Equity Returns and Portfolio Risk, Asal, M, International Advances in Economic Research, Volume 17, number 2, May 2011