The influence of operators taking a quantitative approach has increased considerably in the past two or three years, with inevitable distorting effects on market performance. As has become clear once again following the surprising outcome to the Brexit referendum, upwards and downwards movements tend to be amplified far beyond the levels that would be justified by the fundamentals. This creates enormous opportunities for investors who are capable of recognizing excesses, starting with financial analysis.
Let us consider financial securities. In six months, the FTSE Italy Banks sub-index declined 55%, more than twice the losses posted by the FTSE MIB. For months, banks have been in the crosshairs of those who wish to bet against the stability of the eurozone and can no longer target peripheral government bonds because they are protected by the European Central Bank. Brexit aggravates the scenario because it fosters slower growth, complicates the disposal of non-performing loans and appears destined to perpetuate the low rate scenario, which is proving so harmful to net interest income in the banking sector.
Can the violent correction triggered by the vote in the UK be interpreted as a buying opportunity for Italian banks? Selectively, yes. Our view of the sector remains negative, but there are stocks among the big names in the sector and the mid-size segment that have reached attractive valuation levels from a medium-/long-term standpoint. It bears reiterating that fewer, but stronger, groups will inevitably emerge from the current crisis. However, tensions will remain high until Europe succeeds in finding a definitive solution to the bank recapitalisation problem. The approval obtained by the Italian government for possible government guarantees for national banks to obtain additional liquidity where needed is certainly not enough.
In this scenario, sectors tied to domestic demand performance continue to suffer. It is no coincide that in the first half of the year the luxury sector performed relatively well in comparison to credit, precisely because it is more exposed to international markets. As we enter the second half of this year, this trend seems destined to continue. Unfortunately, the inability to identify an effective solution in a reasonable timeframe, rigidity in applying the rules, even when they appear counterproductive, and the prevalence of bureaucracy over common sense contribute to explaining the distance that has been created between European institutions and the citizens of the Union. When Europe decides to put an end to the banking issue once and for all, it will be time to rotate portfolios into securities and sectors with greater exposure to domestic demand.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.