Rally of Italian shares still has some gas left

8 November 2017

The upward movement in the Italian Stock Exchange has not stopped in the last few weeks. Which has certainly not been a surprise, in fact. The season of the quarterlies, with the bulk arriving in the last few days, is providing, as expected, a boost to the Italian stock exchange list, with a significant contribution from the oil sector. A positive factor. We must be careful, however, not to lose sight of the real driving force of the Italian stock exchange list: the “positioning” of the market, which is indeed firmly on the up.

And although up until a few months ago, financial securities were the driving force in the resurgence of Italian equity, now the cyclical securities are dictating the pace of increase in the FTSE Mib index. To sum it up in a few words, it is the law of alternation of themes.

In effect, the financial securities have reacted coldly to the improvement in Italy’s rating, communicated by S&P’s just a few days ago. The banking sector remains weighed down by fears over the recent rigorous ECB regulations in terms of the management of NPLs (Non -performing loans) vis-à-vis European institutions. A turn of the screw that impacts Italian securities in the sector in particular. The increase in Italy’s credit rating to BBB has a greater effect on utilities which benefit from the reaction of the falling Btp (Multi-year Treasury Bond) spread, with a subsequent reduction in the cost of borrowing to which the sector is sensitive.

In this context, investors continue to be on the upside, therefore moving from securities already hugely appreciated by the market to those that show more potential. So the reaction, all things considered, of the market to the solid quarterlies of some securities was cold.

In the current phase, the market prefers to reward entities with greater growth potential such as various Small Caps and some Big Caps which still have a significant amount of short positions which is gradually falling in the presence of an improving Italian economic situation, promoting a more dynamic trend as regards the prices of attractive securities.

All of which leaves us speculating that the Italian share market may continue to reward investors. We certainly mustn’t forget to monitor developments across the Atlantic. The new all-time highs of Wall Street and its clearly rising trend represent solid support for the Italian share market but it should be pointed out that, excluding the Dollar effect from the performance of the US Stock Exchanges, we can see that the returns on Wall Street for a Euro Area investor are positive but not that exciting. An aspect that emphasises the excellent performance the Italian Stock Market has been registering for many months.

And also the appointment of Jerome Powell as the new president of the Federal Reserve doesn’t appear to pose a threat, seeing as it was not viewed as a sign of break with the monetary policy decisions implemented henceforth by the most powerful Central Bank in the world. The markets suffer when there is uncertainty, which doesn’t seem to be present in the US at this moment in time. The only question mark is the fiscal policy to boost the economy that Donald Trump wants to implement. In what form will he have it passed by US Congress? No matter what the response, it does not appear, for now, to be able to spoil the final year-end acceleration for the Italian share market, which could reward various carefully selected Small Caps in particular.

By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.