About Caesar M.P. Bryan

Caesar M.P. Bryan joined Gabelli Asset Management in 1994 as Senior Vice President and Portfolio Manager of Gabelli International Growth and Gabelli Gold Funds and co-manager of the Gabelli Global Opportunity Fund.

Prior to joining Gabelli, Caesar spent 8 years at Lexington Management Corporation where he served as Portfolio Manager of the Gold Fund, Global Fund and co-manager of Worldwide Emerging Markets Fund. Prior to joining Lexington, Caesar was with Samuel Montagu Company in London for 7 years where he was both an Analyst and Portfolio Manager.

Caesar graduated from the University of Southampton in the United Kingdom with a Bachelor of Laws and was admitted to the English bar.

Background

The fall of the Berlin Wall on November 9, 1989, which signaled the demise of Communism and led to the reunification of Germany, was the most important political event of the past twenty-five years. The creation of the European Central Bank and a single European currency (the Euro) on January 1, 1999 is arguably the most important monetary event since the break up of the Bretton Woods system of fixed exchange rates in 1968.

European Monetary Union is the culmination of a process that began after the Second World War with the creation of the European Economic Community. Although it has taken more than 50 years to accomplish, the creation of a single central bank and currency is now a reality. For the first time, Europe has a truly free market for labor, capital and goods. This dramatic change is presenting some exceptional investment opportunities.

Euroland and the Euro

Of the fifteen member states of the European community, eleven countries including Germany, France, Italy and Spain have signed on to the monetary union. From an economic standpoint, the only significant member state that did not join is the United Kingdom. Two others that held out, Sweden and Denmark now appear to have had a change of heart and are likely to join soon. In all likelihood, the United Kingdom will join in the next few years. As presently constituted, Euroland has a population of almost 300 million and an economy only nearly as large as the United States. If and when the UK joins, Euroland will have an economy that is larger than that of the U.S.

Bilateral European exchange rates were fixed in May 1998 and the Euro was launched on January 1, 1999. European companies can now do their accounting in Eurošs and transactions can be made and settled in Euros. Euro bank notes will not be issued until January 2002, at which point Francs, Deutshmarks, Liras, etc. will be phased out of circulation. This process should be completed by July 2002.

So how is the Euro doing nine months after its introduction? The answer is fine. Technically, the launch was a success, and although the Euro slid against the dollar since the start of the year from a high of $1.18 to about $1.05, the fundamentals remain sound. Inflation is negligible at 1% and the Euroland had a current account surplus of about $100 billion in 1998, or about 1.5% of GDP.

The immediate impact of European monetary union and the new Euro has been the convergence of interest rates. Countries such as Spain and Italy, which traditionally have had high interest rates, will in the future enjoy a much lower interest rate structure, more like Germany and Francešs. For example, three years ago Spanish government bonds yielded 500 basis points more than German government bonds. That spread has now narrowed to almost nothing. Going forward, the Euro will expose and gradually diminish differences in wages and product pricing across Europe. This has powerful disinflationary implications that should keep interest rates low, stimulating economic growth and supporting the currency.

Capital: Free At Last

By far, the single most important impact of monetary union will be the freedom of capital to seek its highest rate of return. This will result in a shift of power from the politicians to the market, or if you prefer, the consumer. And how ironic that this has happened after most of Europe has recently elected left of center governments. Since they are now competing for investment capital, the pressure is on national governments to create capital friendly environments. This should lead, in time, to a convergence of taxation and other regulations, which will lower business costs. Often this will be two steps forward followed by one step backward such as the recent adoption by the French of a compulsory 35-hour workweek. But the trend for less government interference in national economies is clear.

At present, Europešs capital markets are still highly fragmented and insular. In Germany, France and Italy only about 5% of capital is invested abroad. Rub away the currency frontier and capital will no longer be trapped at home. Money will gravitate towards investments that promise the best returns.

Also, until the monetary union was effected, many of Europešs companies were largely limited to a single country, rather like an American company operating in California only. Now, Euroland is borderless and companies will need scale. This will result in an unprecedented level of merger activity, which will impact most industries. This process has already begun. Initially many mergers are taking place within a country in order to benefit from synergies. Over the next several years, there will be more cross border deals.

The French Connection

Look at France. The French have decided to create National Champions. BNP bought Paribas to extend its national reach in the banking industry. Total Fina has agreed to buy Elf Aquitaine to form the worldšs fourth largest oil company, and Sanofi has merged with Synthelabo resulting in a world class pharmaceutical company. Most recently, Carrefour and Promodes have agreed to merge to become the worldšs second largest retailer behind Wal-Mart. Whatšs next? Probably Renault getting together with Peugeot. These French companies will next look for opportunities outside France in a bid to become European champions. Total Fina is already making eyes towards ENI, the Italian state-controlled energy company and Seita, the French tobacco company, is set to merge with Tabaclara of Spain.

European Equities Markets: The New Investment Champion

Currently, European investors hold few equities. In France, Italy and Germany only about 20% of financial wealth is held in equities. Europe-wide pension reform, shifting the onus from government to corporations, will free up capital to seek its highest rate of return in the financial markets. Lower interest rates will diminish the attractiveness of fixed income investments and money will flow into equities markets. Lower Italian interest rates have already resulted in a shift from bank deposits to equities mutual funds in a country with a high savings rate.

In addition, change is taking place at the corporate level. Companies now understand that they need to grow and increase profitability to attract equity capital. This has resulted in companies concentrating on core activities, cutting costs, and implementing more appropriate capital structures. Failure to change will result in languishing stock prices, difficulty in raising equity capital, and even an unwelcome take-over by a competitor or a financial engineer. The most striking example of this was the opportunistic take-over of Telecom Italia by Olivetti. The best defense against an unwanted takeover is a high share price.

Assessing all these trends‹more money flowing into equities markets, corporate restructuring designed to spur growth and increase profitability, and finally, pan-European consolidation‹we see the evolution of the kind of free wheeling capitalism that has spurred growth in the U.S. and contributed to a powerful long term bull market in equities.

Our conclusion is that European equities should enjoy an extended period of superior absolute returns.

Euro Opportunities ­ Many More

Companies are already taking advantage of the New Europe. Two primary examples are Vivendi and Mannesmann, one French and one German, but both with pan-European and perhaps global ambitions. A few years ago, Vivendi was a plain vanilla French water utility with a lot of capital tied up in property and unfocused investments. Aggressive new management has transformed it into a diversified pan-European utility and media company with significant telecommunications assets. Vivendi has several options. It can continue to grow via acquisitions in the media/telecom arenas, or it can sell these assets and devote the profits to building its utilities empire. Either option would likely benefit shareholders.

Mannesmann is a similar story. Historically, Mannesmann was a large, relatively slow growth German-based engineering and steel company. When Mannesmann was awarded the second German Mobile telephone license, it transformed the company. Mannesmann now has a wireless European footprint in Germany, France and Italy. The companyšs telecomm assets already account for about 80% of its market value and management has recently started the process of splitting the company in two. We believe this is the precursor for further deals in the telecom area, with Mannesmann either being a buyer or a potential target for a larger wireless company like the UKšs Vodafone AirTouch PLC.

Nearer to home and quoted on the NASDAQ is United Global Communications, a cable television company which controls United Pan European Communications and other cable TV assets. UPC is aggressively acquiring and consolidating cable assets in Europe. In a deregulated Europe, this company has an excellent opportunity to become the leading cable operator on the continent with the potential to add telecom and internet offerings to its cable service.

The first decade of the new century could be Europešs turn to shine. In the 1980šs Japan did best and in the 1990šs the United States has been the star economic and stock market performer. Now it is Europešs turn. American investors successfully identifying opportunities in Euroland will be grandly rewarded.