18 March 2020

Italy is facing the Coronavirus emergency ahead of other European countries and could also be the first to leave it behind. Nevertheless, problems are confounded by the Italian structural situation, with rather anaemic economic growth and high public debt in recent years. Therefore, if no coordinated approach emerges from the EU to tackle the impacts of the virus, Italy will clearly have more difficulty than others in implementing effective action. Nevertheless, considering that this will be a global phenomenon, it is likely that Italy is also ahead of the game in terms of the market-loss phase.

Regardless, selectivity is required in this phase because there is currently too much market uncertainty. Monetary instruments are of little use, and fiscal measures need to be assessed on a specific basis, considering their structure. The market has chosen the simplest route. It has reduced stock market capitalisation by 40%, a reduction equal to € 200 billion (Source: taken from Borsa Italiana data). This drop is partially justified, let’s say, by 10% for lower profit expected both for this year and for 2021, and another 10% can be attributed to the reduction in stock market multiples—also due to the fact that initial market prices were very high—whilst the remainder can be attributed to expected increased borrowing by listed companies.

Prices seem to take account of a good portion of the negative scenario. In this regard, however, it is not so much a case of whether the market will fall further, as nobody can rule out the possibility of additional losses, but rather a case of predicting how long it may take to get out of this situation, i.e. when the country will return to a normal life and business as usual. At the moment, the market reflects a rather negative scenario, but it is also true that opportunities do exist, e.g. utilities. One certainty is that interest rates will remain low. Thus, stocks in companies capable of offering returns and less directly linked to variables which are difficult to predict at the moment, certainly have more attractive relative valuations compared to the rest of the market.

The situation for the financial sector is altogether different. I believe that the ECB’s focus is not on ensuring profits for banks but rather on simply keeping them afloat, ensuring that the “financial highways” do not interrupt financial flows to business. On one hand, there is the reassurance that the banks will not fail because the regulator will allow them to do “almost anything” to survive, while on the other, it is important to remember that it will be very difficult to generate profits with the scenario taking shape.

Meanwhile, looking at “Made-in-Italy” small and medium enterprises, featuring good management, a focus on exports, and competitiveness in international markets, it is necessary to distinguish between investors and fund managers. In fact, if the situation is that, sooner or later, even within two years, a solution is found for the epidemic, on the basis that, over the next two years there will be a lot of liquidity in the system, there are various stocks that are definitely attractive at these prices. The individual investor with liquid assets to invest for the medium–long term, without immediate personal and family budgeting requirements, may begin to selectively consider some of these opportunities. A fund manager, on the other hand, must consider portfolio liquidity. In the event of significant, unexpected redemptions, managers must not find themselves forced to sell positions which may generate huge losses as further significant reductions in the already low current values cannot be ruled out.

Interview with Massimo Trabattoni, Head of Italian Equity.