Scared of Stocks

Ordinary Europeans are leery--and that's bad for Europe

European shares surged on Mar. 18, after U.S. President George W. Bush's ultimatum to Saddam Hussein finally removed the uncertainty about war with Iraq. But Klaas-Jan Veerman, a retired Dutch building contractor, was by no means impressed. "I've learned my lesson about investing in equities," he says over a glass of malt beer in 't Goude Hooft, one of The Hague's oldest restaurants. "However long this rally lasts, you won't find me buying stocks again."

Like many of his compatriots, Veerman was badly burned when shares in grocery giant Royal Ahold (AHO ), the most widely held Dutch stock, nose-dived on Feb. 24, after the company admitted overstating earnings at one of its U.S. subsidiaries. Compounding the damage, Veerman lost thousands of dollars more in early March, when shares in Anglo-Dutch steelmaker Corus plunged amid boardroom wrangling about how to restructure the loss-making group. "These scandals and rows really drive home how dangerous share ownership can be," he says.

Remember Tulip Mania? That was the nutty episode in the 17th century when the Dutch and other Europeans speculated in tulip bulbs, driving prices sky high, until the market crashed. Merchants, housewives, sailors -- everyone lost big-time. It took a long time for the Dutch to recover their taste for investments of any kind.

A similar scare is working its way today through the ranks of Europe's retail investors. It's easy to see why. Many investors got into the market only within the past decade, sinking savings and retirement money into privatized state-run companies that seemed conservative, safe, and secure. The list of such companies that have since blown apart because of bad luck, risky acquisitions, or poor management stretches around the block: Deutsche Telekom (DT ), France Télécom (FTE ), Britain's Railtrack, British Airways (BAB ), and Air France, just for starters. And of course almost every Italian shareholder owned Fiat, and every Dutch investor Ahold -- you could buy the latter's shares with coupons picked up while food shopping.

Now, the stock of most of those companies is worth 20% or less what it fetched in 2000 (charts). "I lost more than £20,000 [$31,000] on Railtrack," says Alan Macdonald, a teacher in Glasgow. "And my shares in other privatized companies are doing really badly. I wish I had never bought them." British Energy PLC shares, which were floated at $3.16 seven years ago, now go for 8 cents. Then there are the younger shareholders who thought they could make a killing buying into the high-tech companies on Germany's Neuer Markt and other tech markets. The Neuer Markt itself is gone, dissolved after its market cap went from $233 billion in early 2000 to $20 billion when it died last year. "Millions have lost billions," says Christopher Watts, an equities analyst at Frankfurt's private Metzler Bank.

As a result, Europe's fledgling equity culture is in danger of collapse. From Spain, where Alberto Cortina and Alberto Alcocer were sent to prison on Mar. 14 for defrauding investors in a Madrid property deal, to Sweden, where the share price of widely held Skandia Insurance Co. collapsed as a result of rash investments abroad, retail investors are turning their backs on equities. Trading volumes on European stock exchanges are almost 10% lower now than they were a year ago. Retail investors may not be selling what they already own: They're disciplined enough not to sell at what could be the bottom. But, says a London fund manager, they are not buying new shares or stock mutual funds. This manager believes hedge funds and other institutions were mainly responsible for the recent surge. "Retail investors aren't anywhere to be seen," he says.

If the share aversion persists, it could be bad news for Europe. The European economy needs robust stock markets to help fund the corporate consolidation and entrepreneurship that drive growth. In addition, there are still hundreds of state-owned companies with plans to privatize, plus many family-controlled outfits that will eventually go public. Moreover, cash-strapped governments need to wean their citizens from expensive public pension systems and persuade them to sign up for private plans that invest part of their assets in shares. Otherwise, their economies risk being crushed by the tax burden. But recent attempts to interest German and Italian workers in private schemes have been unsuccessful. "I trust the state more than the private sector to look after my pension money," says Heide Wagener, who runs a small hotel in Frankfurt.

Many financial-services companies have been hit hard by the reluctance to buy equities. On Mar. 14, Frankfurt's Fritz Nols Global Equity Services announced it would shut down, making it just the latest in a long list of small brokerages forced out of business in the past year. "We don't think things will get better for the foreseeable future, so it is our only alternative," says managing board member Rudolf Reil.

Asset-management companies are also being weakened, because the amount of new money coming in has fallen. Thomas S. Marsh, a consultant in the London office of Cerulli Associates, which researches trends among money managers, says a growing number could find themselves on the block this year. In Britain, there has been an unprecedented slump in the number of retail investors buying individual savings accounts (ISAs), tax-free equity savings plans. "Even with valuations so low, people are scared of shares," says Leslie Coleman, a London investment adviser.

Analysts say national and European Union policymakers and regulators need to take action if the cult of equity is to return. First, they need to improve accounting and corporate governance standards and transparency, preferably on a Europewide basis. Next, national governments need to force through more radical pension reforms and give citizens bigger tax incentives to switch to private schemes.

EU Internal Market Commissioner Frits Bolkestein has promised a batch of tough new regulations, which will include fuller disclosure, electronic voting rights, and controls on directors' salaries. And the EU has already decreed that by 2005, all listed companies must adhere to the rules set by the International Accounting Standards Board. But critics wonder if the new regulators will be up to the task. "We need active supervision as well as rules," says Peter Paul F. de Vries, vice-president of Euroshareholders, a Brussels lobbying group.

Wilhelm Rasinger, the head of the Austrian Shareholders Assn., says: "I'm relatively optimistic that investors will return and that the equity culture will continue to develop." But Dutch retiree Veerman isn't so sure. "I listened to the financial experts last time and lost a lot of money," he says. "Now, I'm too wary of equities." Millions of Europeans feel the same way.

By David Fairlamb in The Hague

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