EMU and the Asset Allocation Decision

Abstract

The EMU countries now share one central bank, one monetary policy, one short-term interest rate and one currency. This structural change has led to many proposed new opportunities to add value in Global Asset Allocation. We investigate many of these proposals, and conclude that most - but not all - are without merit. For example, we conclude that the sudden move from country-based models towards sector-based models is premature, as country factors are likely to increase in importance for the next few years. Sector factors will eventually dominate, but not until Euroland business cycles are synchronized. So the best opportunity to exploit EMU is to allocate across countries in the intermediate term, while preparing to allocate across sectors in the long run.