Europe Still Looks Bright - but No Longer Stellar

To make the grade in the financial market's classroom this year and next, think "Europe," experts agree.

Buoyed by the introduction of a common currency in January 1999, nations of the European Union (EU) should chart continued economic growth, although at a more modest clip than during 1998.

Moreover, key nations outside the EU - such as the United Kingdom - are expected to post steady market gains in the months ahead.

All that adds up bodes well for investors. But don't expect the outsized returns recorded in1998.

European funds, along with big, blue chip growth funds in the US, have been the clear winners of the market this year. While most general stock funds have fallen sharply in value since the summer, large cap US blue chip funds such as the Magellan Fund and the Vanguard 500 Index fund have held their own, along with many European funds.

"Europe may be the healthiest of the [global] economic regions during the next four quarters," says David Wyss, an economist with Standard & Poor's DRI, a consulting firm in Lexington, Mass.

"Interest rates are already converging downward there, because of the upcoming introduction of the euro [the region's new currency]. And we expect rates to be reduced slightly even more," Mr. Wyss says.

"Germany will be the key," he adds. But he also expects healthy growth in Spain, Italy, and the UK.

But the growth does not necessarily mean vibrant. Most major investment houses have slightly reduced growth targets for Europe through 1999.

Morgan Stanley Dean Witter, for example, has reduced estimates for EU nations to 2.2 percent, down from 2.7 percent. Merrill Lynch pulled back its estimates to about 2.4 percent, also down from 2.7 percent this year. But growth should be up slightly in Italy, while holding steady, perhaps down modestly in Germany, France, Spain, Sweden, and the Netherlands, Merrill concludes.

Not surprisingly, many mutual-fund analysts continue to recommend a position in Europe. Case-in-point: Sheldon Jacobs, who publishes the No-Load Fund Investor, based in Irvington-On-Hudson, N.Y., lists a European-linked fund in some 12 of the 15-model portfolios tracked in his newsletter.

If you invest in a European fund, look for future growth, not just past success, says Tricia Rothschild, who follow European funds for Morningstar Inc., in Chicago.

She recommends that investors include some European exposure in their portfolios, and notes that many global or international funds provide it through their European investments.

Funds that Ms. Rothschild finds attractive include the Scudder Greater Europe Growth Fund; Bartlett Europe Fund, and Invesco Europe.

European small-company funds look especially appealing, she says, because those stocks are much cheaper than blue-chip firms.

Ironically, many European small-company stock funds are not specifically listed. You have to use screening programs, such as the one on the Morningstar site (www.morningstar.net). Search for small-cap funds, then look for funds with a heavy exposure to Europe.

Finally, several Web sites frequently focus on Europe, including Morningstar and Worldly Investor, an informative new site (www.worldlyinvestor.com).