Italian equities, maintain a selective approach
In December the Italian stock market closed in the negative (FTSE MIB -3.7% and FTSE Italia Star -1.5%), in line with the main European and US equity indices: STOXX Europe 600 -3.30%, S&P 500 -5.8%, Nasdaq Composite -8.7% and Dow Jones -4.1%.
Looking at the start of the new year, Italian large caps are outperforming European ones, with the FTSE MIB so far recording +11.7% compared to the +6.8% of the STOXX Europe 600. The sectors that have contributed most to European YTD performance are retail (+16.8%), travel and leisure (+15.7%) and consumer products and services (+14.6%), likely due to a repositioning by investors following the sell-off in 2022. On the other hand, Italian mid caps have so far recorded a slightly lower performance than the European market, with the FTSE Italia Star gaining +6.3% compared to the +6.8% of the STOXX Europe 600, which is most likely attributable to flows that are still weak following the strong underperformance of the previous year.
The outperformance of the FTSE MIB is due to its composition, which makes it preferable to other European indices, for example the DAX, since it is less cyclical, or rather it would be more correct to define it as less early cyclical since the weighting of the financial/credit system is higher in the FTSE MIB than other European indices, which have more industrial securities.
In the lead up to quarterly reporting, we believe that the banking sector will deliver decent numbers thanks to the increase in rates, which is traditionally favourable to interest margins in the initial stage. In the financial sector, we are once again optimistic about the asset management sector, which will indirectly benefit from the increase in rates and seems to have created the conditions to leave behind a particularly difficult 2022. As regards the other sectors, expectations were heavily scaled back throughout 2022. There is, therefore, the possibility for companies to beat estimates on turnover, where much will depend on consumption, as well as on profits, where the return of inflationary pressures could help the corporate world.
At least for the next few weeks, equity investors will be focused mostly on the February/March reporting season, during which companies will present their annual results and provide an outlook on 2023. The year 2022 was characterised by an undifferentiated squeeze on multiples triggered by the increase in rates rather than a deterioration in fundamentals, whereas, in 2023, this dynamic should slowly peter out, with the equity market’s expectations incorporating multiple expansion. However, the challenge that awaits us this year will be selecting securities that were penalised in 2022 by the macroeconomic scenario and, in 2023, will offer not only an upward revision of profits, but multiple expansion, thanks to a monetary policy of rate increases now thought to be less aggressive (e.g. utilities, technology).
As a result, it will therefore be fundamental to monitor the juxtaposition of implicit expectations in the bond and equity markets, with bonds predicting a recession and equities, on the contrary, expecting earnings growth.
Though the rate increase in 2022 was abrupt, we must not forget that it came after years of anomalies, such as quantitative easing and negative rates. We experienced a phase of normalisation that indiscriminately restricted multiples. The expectation is now that strategies based on bottom-up approaches — i.e. the analysis of fundamentals — will once again be profitable compared to the macro approaches which have guided the market in recent years.
From this perspective our investment decisions in Italy do not focus on sector but strive to find value in companies that were able to adapt to changes in their reference markets, companies that, in some cases, suffered a temporary decline in profits but remain in a good position to come out on top after some recent difficult years.
In December, the 2023 Budget Law was approved, which allocates approximately €35 billion €21 billion of that amount to increasing the deficit to fund new measures in Q1 to support households and businesses following the recent energy price hike. Other measures include the flat tax for VAT-registered professionals with revenue up to €85,000, the cut in the tax wedge and the review of the citizens’ income welfare scheme. In the coming months, the Italian government intends to focus on tax reform, which should provide for a reduction in IRPEF rates, widen the pool with access to the flat tax and introduce the family quotient. A first draft is expected to be available within the first quarter.
Commentary by Massimo Trabattoni, Head of Italian Equity.