Where the Euro Is a "Buy" Signal
When they saw the design of the euro banknotes that will be introduced across the 12-nation euro zone on Jan. 1, the folks at Gucci spotted a chance to reap economies of scale. Because the new bills are bigger than the lire notes they will replace, Italians are going to need larger purses and wallets to hold them. So the Italian luxury goods company will introduce into Italy the purses and wallets it sells in countries, such as Germany and France, that have bigger, euro-size banknotes. Analysts predict brisk sales, boosting Gucci's revenues and buoying its shares.
Luxury goods companies like Gucci (GUC ) and Bulgari (BULPF ), construction companies such as Spain's Grupo Dragados, upscale retailers like Germany's Escada, and banks such as Crédit Lyonnais (CLYJF ) and Commerzbank (CRZBY ) are just a handful of European names likely to get a lift from the historic switch to euro banknotes, making them more attractive to investors. Indeed, the euro's evolution from electronic currency to actual notes and coins will benefit many parts of the Old World's battered economy. "Consumers, companies, and investors will all be more psychologically committed to the euro once they can touch it and spend it," says Johannes Reich, head of equity research at Metzler, a Frankfurt private bank.
This, in turn, is expected to bolster the single currency's legitimacy and speed all the trends that were unleashed when it was launched electronically three years ago. Among those changes are increasing trade among the euro zone nations and a rise in mergers and acquisitions.
BIG WINNERS. Some industries will benefit in surprising ways. Upmarket consumer goods companies are likely to profit. That's because the need to swap existing national currencies for the new supranational money will force Europeans to bring back into the legitimate economy up to $100 billion in black market cash. They won't want to exchange large wads of cash at the bank and raise suspicions of money laundering. So they'll probably channel a chunk of it into consumer durables--particularly luxury items with investment cachet, such as Swiss watches, fine wine, jewelry, and antiques. Ian Harnett, a European investment strategist at UBS Warburg in London, says that German carmaker BMW, Italian jewelry house Bulgari, and British auction house Sotheby's (BID ) could be among the big winners. "Perhaps even the odd Old Master will change hands at record prices," he says.
Certain financial institutions will also come out on top. Bankers say the new notes will strengthen the monetary union and make it harder for national authorities to block cross-border mergers. That should result in a merger boom in financial services. As a result, share prices are rising among banks and insurers that look like takeover targets. Among them: France's Crédit Lyonnais, Germany's Commerzbank, and Italy's Monte dei Paschi di Siena.
Banks, insurers, and money managers could also benefit as people swap existing cash for new notes. The easiest way to do so will be to deposit the money into banks or invest it in stock and bond funds and life-insurance policies. Some underground money may also go this route--especially in countries such as France, which has relaxed its restrictions on the amount that can be paid into accounts without being reported. Harnett thinks companies with significant wealth-management businesses, such as BNP Paribas (BNPQY ) in France and Sanpaolo IMI (IMI ) in Italy, stand to gain.
The construction sector is also expected to do well, partly because much more cash than usual will be sloshing around the system. The construction industry usually benefits when there is plenty of liquidity because consumers spend more on housing and home improvements. That's good news for building-materials suppliers such as France's Compagnie de Saint-Gobain, Spain's Grupo Dragados, and Italy's Buzzi Unicem.
The stocks of companies involved in the manufacture and distribution of the new notes and coins have already risen, but probably have further to go on the back of strong revenue growth. Security-transport enterprises such as Securicor and Pittston Brink's Group are fully booked between September--when the first new coins will be delivered to the banks--and next March, when the old currencies will be taken away for destruction or recycling. They expect bumper earnings this year and next. Vending-machine makers such as Spain's Grupo Azkoyen are also poised to do well because of record demand for new machines that accept the euro notes and coins or contracts to convert existing machines.
The euro notes' arrival isn't good news for everyone. Run-of-the-mill retail banks could be losers in the short term because they'll be saddled with much of the enormous cost of introducing the notes and coins--including transportation, insurance, and customer-information expenses. The Association of German Banks says the conversion will cost its members around $63,000 per branch. Midmarket retailers will be hit almost as hard. The changeover could mean fewer sales during the usually busy January shopping period because the complications of dealing with different bank notes could lead to longer queues. Besides, stores will need extra staff and security to handle up to 10 times more cash than usual as they take in old currencies and give out the new. That could hurt the profitability of retailing chains like Germany's Kaufhof and France's Carrefour.
But for investors, there are lots of opportunities to cash in on Europe's new cash.
By David Fairlamb