This November, all the major global equity indices are performing positively: on the Italian market, the FTSE MIB is up 7.4% (+30.8% YTD), the Stoxx Europe 600 is up 5.4% (+11.0% YtD), the S&P 500 8.6% (+20.2% YTD) and the Nasdaq 11.3% (+37.5%YTD) in local currency (total return).
Equities have outperformed mainly thanks to the Fed and ECB’s decision of keep interest rates unchanged for the present, while they ponder the option of further increases in the event of macroeconomic data again pointing towards rising inflation. In the meantime, this pause has fuelled expectations for a more accommodative monetary policy in 2024, leading to a generalised rebound in equities and bonds.
In Italy’s case, the strong performance of the large caps and the narrowing of the 10-year BTP-Bund spread are due also to the country’s sovereign rating gaining affirmation by the four main agencies (Standard & Poor’s, Moody’s, Fitch and DBRS), including the surprise upgrading of the country’s outlook from “Negative” to “Stable” by Moody’s.
This has further boosted the banking sector’s outperformance, at least in the short term, with momentum expected to remain positive until the end of this year; but the medium to long term will prove more challenging when the resilience of the macroeconomic environment becomes more visible and market preference shifts more towards other sectors.
Despite the recent rebound, we continue to emphasise the strong performance divergence that has set small and mid caps against large caps since the beginning of the year. In fact, the Star and Aim indices, despite having respectively risen +9% and +2.1% YTD in the month, lost -3.3% and -15.1% overall. We therefore argue once again that these last few months of the year offer excellent opportunities for the selective purchase of small and mid-cap stocks, whose valuations are still particularly reduced due to the indiscriminate rate hike, but whose evidently resilient business models and margins have seen them weather the uncertainties of the past months.
As we write, the third-quarter reporting season is drawing to a close. Investors have been spending this time trying to divine the state of end-consumer health and have settled on the resilience of volumes and pricing from now until end of the year and into 2024. Close attention is also being paid to the trend of progressive destocking (i.e. disposal) of inventories inventories resulting from purchases of the past months and possible increases in the price of energy (oil in particular), given the renewed geopolitical turbulence caused by the escalating Israeli-Palestinian conflict.
Commentary by Massimo Trabattoni, Head of Italian Equity