Little help for ailing euro

THE euro is having some difficulty clinging on to its abrupt rise against the pound (though little against the dollar). It remains well below its level a year ago.

For nearly three years, predicted recoveries of the euro have failed to materialise. One often overlooked factor has been the effect of its arrival on the bond market. German Treasuries could once be bought by anyone in the world, confident that the Deutschmark was a strong and reliable currency.

But with monetary union, that reliability disappeared. German bunds, reckoned in euros, became liable to the uncertainties long associated with the lira, the peseta, the franc and even the drachma. A slacker flow of money into bunds and thus into the euro inevitably helps to weaken the single currency. On the much wider issue of the equity markets, it is also hard to see external funds flowing readily into European markets in the near future - even though the attractions of Wall Street are likely to decline.

The scale of the misjudgment by analysts is painfully clear. At the beginning of the year, the consensus was that eurozone earnings per share would rise by 10%. In the event, they have fallen by about 12%. Expectations for economic growth in the eurozone this year hover around 1% (after 1.6% in 2001).

Share prices fell about 18% over the year. But this would not seem to make sufficient allowance for what promises to be a very disappointing 2002. And this is despite cheerful noises still made by brokers' analysts - dammit, they have to sell stocks somehow.

At least the US is adapting to its new and tougher environment. But in the eurozone with its quaint laws and the emphasis on 'job preservation', recovery is far less certain. Not much help for the euro there.

A READER upbraids me for saying that there is effectively no such thing for investors as a postponed decision - only a decision that a stock is or is not worth holding. Surely, he says, 'wait and see' is a wise approach before ditching a stock just because it is currently underperforming? Surely he should be a long-term investor.

This approach is understandable. We are often told that the stock market is too skewed to the short term (especially by companies whose stocks are underperforming). And a desire to put off a decision to sell is understandable because constantly trading one's stocks is demanding in terms of time and effort. But the basic premise holds.

Suppose, for example, you bought a stock at 100p. It falls to, say, 80p for various reasons but you hold on, hoping like Mr Micawber that something will turn up.

You should ask yourself the key question. If you had spare cash, would you buy that stock at that price, given all the information which caused the fall. If the answer is Yes, then fine. But if it is No, then your decision to hold the stock - 'postpone' any decision to sell - is inconsistent with your assessment of the shares.

The same is true of a stock that has outperformed your expectations. Suppose it has risen from 100p to 130p. Would you, if you had spare cash, still buy it at that price - naturally after considering all the information about why it has risen. If the answer is No, then again the time has come to sell - normally a much easier decision emotionally than admitting to a wrong purchase.

Dealing costs, which vary according to the size of the deal and the broker involved, must, of course, come into the calculation. And it may be that you cannot see an attractive alternative for your money at the moment. But that is unlikely, given the size and nature of the stock market. Anyway, keeping cash in hand is rarely, if ever, a mistake.