ITALIAN MARKET: CAUTION APPROACHING NEW PURCHASE OPPORTUNITIES

The last two weeks of December 2018 have seen the Italian government reach an agreement with the European Union regarding its deficit/GDP ratio, offering relief to the Italian government and therefore to the spread. In fact, the agreement between the parties relaxed tensions for Italy as a whole, although the question has not been resolved but rather postponed to next budget law.

Having put this stand-off with Europe to one side for the time being, the Italian market, together with global stock markets, supported by Powell’s accommodating speech and a semblance of commercial peace between the United States and China, has been able to participate in the usual January rally, benefiting from the liquidity typical at the start of the year and the consequent portfolio rebalancing.

Once the giddiness of this sudden re-increase has faded, the market must take a reality check and decide which direction to move in. Uncertainty persists:

• the European elections in May could define a different European profile compared to that which we are used to, driven by souverainism and populist forces that have gained support in states on the continent;
• Despite leaking optimism regarding dialogue with his Chinese counterpart on social media, Trump has still not closed any deal. Given his unpredictable nature, he could surprise the markets either positively or negatively;
• there have been clear macro signals of a slowing cycle in Europe and the United States with weak PMI and ISM, respectively;
• the process of normalisation continues in monetary policy.

It is therefore necessary to approach 2019 with caution, even if there are significant purchase opportunities generated by the past year’s sell-off in the Italian investment world and beyond.

Looking at the Italian market in more detail, it is interesting to note the behaviour of two key sectors: on one hand, utilities, which returned to the peak relative strength reached in summer 2016 when US rates were increased and could therefore halt their momentum. On the other hand, the banking sector continues to suffer due to the landscape of low rates.

By Massimo Trabattoni, Head of Italian Equities at Kairos.