The market was under the misguided impression that Italy was capable of quickly identifying a definitive solution to the problems that afflict its banking system. This was overly optimistic. Certainly, the initiative launched by the government on two fronts – the Atlante Fund and the decree announced last Friday to reduce debt recovery times – have the distinction of avoiding disaster.
It is a step in the right direction, aimed at fostering development of a secondary market for non-performing loans and eliminating the risk of a bank bail-in from the market. Atlante will purchase the most junior tranches of securitized loans. The senior tranche – as long as it is rated investment grade – will enjoy a government guarantee in the form of the GACS instrument (Guarantees for the Securitization of Non-performing Loans). The mezzanine tranche could be attractive to many institutional investors, starting with pension funds. However, digesting the mass of non-performing loans will take time.
It bears mentioning that the banking system’s margins will remain under pressure for several years, due to the measures adopted by the European Central Bank to combat deflationary tendencies. For the moment, the demand for performing loans is still limited. A speedier recovery would contribute to breathing new life into the financial system, among other aspects. Above all, we would like to see a recovery of private investments by companies: yet before companies put the domestic economy back into motion, a more reassuring scenario with fewer question marks is needed. For now, there is improvement in some numbers, above all unemployment. Yet it is early to say whether the recovery is well on its way to consolidation.
In the meanwhile, the focus remains on highly visible securities with low expected earnings volatility: regulated businesses, municipal companies and utilities: a tendency destined to continue, because it expresses the attempt by many investors to take refuge in segments of the stock market that offer returns and relative stability, which can no longer be found in fixed income. During this phase, expanding our horizons to include small caps, several industrial names operating in fragmentary markets with strong growth potential through possible mergers and acquisitions could be of interest.
On the currency front, the appreciation of the euro against the dollar seems to be almost over. From now until year-end, the euro/dollar exchange rate is expected to fluctuate within a range of 1.10 to 1.20.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.