The euro will lower the risks between countries and allow investors to pick the best stocks in different industries across the continent with much less chance of losing out on currency movements. And that will tend to mean buying the major caps as relatively unfamiliar investors emerge from domestic markets for the first time, experts say.

Although Britain will be a non-starter when the euro is introduced in January, the signs are that the pace of change will be rapid. ``Don't expect dramatic change from January 4,'' said M&G Group research manager John Hathaway.

``But even in London, European shares will be quoted in euros and the European equities will move from a fragmented market to the second biggest equity market in the world and UK companies may (as a result) want to see theirshares quoted in euros.''

Investment analyst Gary Dugan at JP Morgan said: ``The mood in the market is leading towards trying to deal in the same currency and on the same settlement system. The single currency will accelerate that trend.'' What would also speed the process would be the establishment of a definitive blue chip stock index, market analysts say.

The route into cross-board portfolios could be via fairly homogeneous sectors like oils, banks and telecommunication companies where comparisons are easiest.

``The process is under way and fund managers are already rebuilding their teams to take account of sectors rather than companies,'' Dugan said. He noted that recent data showed that at a retail level, Italian investors had put more into international funds than their domestic funds and similar results had come through from France and Spain also. ``Retail products are being marketed as exposure to a European basket of shares rather than just domestic markets,'' he said, adding that this had beendeveloping during the past 12-18 months.

The shift of emphasis towards pan-Continental stock picking has matched the growing tendency of stocks within industrial sectors to correlate their movements.

``The last few months have seen the correlation between stock in sectors increasing to produce more efficient stock-sector behaviour,'' said Dugan, adding that investors have confirmed to him that they are moving towards sector rather than country as a basis for asset allocation. Analysts say that investors risked serious danger by ignoring research at national market level.One described the risks as like ``trying to cross the road by looking only one way.'' ``After the euro, countries may almost disappear but looking at one (sector or country) and not the other, might mean missing potential risks and opportunities,'' said Peter Sullivan at Goldman Sachs. If, as experts forecast, the trend develops into rebalancing portfolios to take account of a pan-European stock pool, the shifts could be on a giganticscale. Collated data from a variety of sources gives an idea of what is at stake. At least $8.0 trillion of capital is in European fund management hands of one kind or another.

That compares with a European equity market capitalisation of around $6.0 trillion, according to the Federation of European Stock Markets figures for end-1997.

In a recent paper, Merill Lynch's director Steve Malinowski of global portfolio strategy, estimated that as much $150 billion could be mobilised if only five per cent of European pension fund pension holdings are shifted out of fixed income markets and into equities which currently house less than 20 per cent of holdings.

According to his research, most of the re-routed funds would go into blue chip, large cap stocks as fund managers restructure their portfolios to take advantage of their long-term out performance of smaller and medium-sized stocks.

Dugan of JP Morgan agreed. ``New investment tends to focus on big cap, top index stocks, as they are what investors areused to. ``That means that small- and medium-sized caps could under-perform initially but they might get a lift from the establishment of small/med cap funds,'' he added.Sullivan of Goldman Sachs forecast a similar tendency. ``We are likely to see the rebalancing (of portfolios) done through larger stocks,'' he said.``Large caps will be disproportionally involved so the large cap phenomenon will continue but for how long ? ''

According to some analysts, it could be a very long time as they argue that the optimum size of a firm may have risen, allowing the large caps to gain their advantage and hold on to it. ``There is no guarantee that the small caps will catch up,'' said Sullivan.

``Communications technology (for instance) may have made it easier and more efficient now than before to run a company on an international scale,'' he said.

However, ``euroland'' could create a powerful argument that investments should also be made on the basis of country stock markets and not only sectors, according to apaper by head of European research Kevin Coldiron at Barclays Global Investors Europe. The European Central bank (ECB) will attempt to set euro interest rates for all 11 members, but may be influenced by conditions in Europe's largest countries. Elsewhere, this could create a massive boost during a period of expansion, according to Coldiron. ``Because capital and labour movements across borders are still less than optimal, zones of high and low growth may develop and persist for a considerable time,'' he said.

``For equity investors this means that differentiating investment opportunities along country lines will still be important, he added. Smaller companies were likely to retain high exposure to local economic conditions, Coldiron argued. Analysts say the future investment role for the smaller- and medium-cap stock could be in providing bets against national economies.

``There is still enough correlation between these stocks and a local economy to make a sensible investment,'' said Dugan.Givingexamples like Italy and Norway, Sullivan added, ``Some of the national stock markets have a very high correlation.''

M&G's Hathaway noted that in pan-European terms, small cap index investment would be a very specialist area. As in Britain, for instance, small caps accounted for only five per cent of total market capitalisation (against the FTSE 100 at 76 per cent and the top 10 caps at 30 per cent).``The European small caps index has had a good last six months after falling behind hitherto,'' he said.``Europe's small and medium cap companies have become more attentive to the stock exchange. We are seeing more small caps coming to the market (to raise money).''