Investing in the euro zone

The main reasons for investing overseas is to avail of a broader range of opportunities and to reduce dependence on the domestic economy. A person is unlikely to want both their income and savings tied to the fortunes of the local economy and so may seek to invest savings overseas, writes Bernard Swords

However, this is not without cost, most notably in the form of currency fluctuations. As an example, if you invested in the US this year, you would have lost seven per cent on the currency movement alone. This is one of the principal reasons for investing in the euro zone.

For someone looking for a fixed-interest investment, there is no diversification to be obtained by looking at the euro zone, as the yield and price moves of Irish Government bonds are almost identical to those of any country in the euro zone. Rather, it is in equity and property markets that diversification can be obtained. The euro zone equity market gives exposure to different economies, different industries, different valuations and a broader range of world leading companies. Currently, the outlook for euro zone economic growth, ranging from one per cent to two per cent is not as good as that for Ireland at three per cent to five per cent over the medium term.

For industry diversification there is a strong case for having some euro-zone exposure. Some major industries are not represented in the Irish market or not represented in significant size, such as oils, consumer products, retailers, pharmaceuticals and technology.

The euro zone property markets also provide diversification from the Irish economy. Irish investors have become increasingly active in European property markets over the past five years. The elimination of currency risk, a low-interest-rate environment and the availability of favourable debt terms have encouraged investors to look beyond the traditional overseas market of the UK. Irish investors are drawn to the attractive net yields that European property offers. Typically, individuals and syndicated investment groups are focused on office and retail investment opportunities in the major cities.

The relatively attractive net yields that are available on investment properties in the euro zone reflect differences in the structure of European leases from the Irish version. European leases are short-term, ranging from three to nine years and rental growth tends to be indexed linked.

Bernard Swords is chief investment officer and David Clarke is property investment specialist at Goodbody Stockbrokers