The announcement on 2 February by President Mattarella that he intended to appoint Mario Draghi as possible Prime Minister of a broadly-agreed technical government, was a turning point for the Italian indices which quickly recovered all the underperformance of the previous month, deriving from the political crisis; now, they are over-performing the rest of the European markets as positive news gradually arrives with regard to the creation of the new Government, supported by most parties. Specifically, from the beginning of the year to 20 February 2021, the FTSE MIB gained 3.2% compared to the 3% of the CAC and the 1.5% of the DAX, while since Draghi was announced, the FTSE MIB has gained 4%, the CAC 3% and the DAX only 0.5%. In this first stage, driving the market rebound were certainly banks and traditional financial securities; these benefited materially from the shrinking of the spread under 100 points and in general from the improvement of the outlook of the country, that inevitably will lead to a rerating of the sector which was trading sharply down from the assets compared to the European peers. Together with financials, securities linked to the re-opening and more related to the economic cycle and the pick-up of inflation went well, while growth securities and utilities underperformed, suffering as interest rates rose again and investors repositioned.
It is worth looking closer at the subject of Draghi to try to assess how great the opportunity for Italy is. Firstly, the outline of the political programme, as described by Draghi over the last few weeks, is encouraging. Besides the inevitable commitment to accelerate the vaccination campaign “with all means available”, he highlighted two fundamental themes in his speeches to the Senate and the House: the need to implement the structural reforms to restart economic growth and the profoundly pro-European nature of the Government in terms of foreign policy. Both themes are extremely important for the market, which for years has asked Italy for a structural change to stimulate growth and which at the same time is always frightened by the anti-Europeanism of the populist parties. This type of action in addition reassures the financial world, which until very recently considered Italy a market with too much volatility and therefore not investible. It is presumed therefore that this will lead to a return of flows towards Italy, which instead in the last few years had seen volumes on its indices decrease, and probably also the closure of many short positions, on both single securities and on the country in general.
The news of the creation of this new Government turns out to be even better, if we consider that Draghi will have available more than 200 billion euro to relaunch the country, thanks to the Recovery Fund. The market, in fact, was not convinced that Italy was going to manage to effectively spend all these resources with the Conte government (which was based on fragile compromises and very tight numbers), while it is ready to bet that Draghi will not only finance the most urgent projects, but will also undertake to put in place a wide-ranging plan with long-term objectives. And on the other hand, in the statements on economic policies released to the press over the last few months – as in the speech to the Senate a few days ago – Draghi not only committed himself to further stimulation measures to protect businesses and employees, but also listed a series of structural reforms aimed at restarting growth. Among these: the reform of tax, in part to reduce the high tax pressure on the middle class, in part to encourage an increase in the employment rate of women, the reform of the judicial system, the reforms of the public administration, the reforms of the labour market, digitalisation and climate change.
This is the type of change of pace that the market expects from an Italy guided by Draghi, having available enormous European resources; and if these expectations are fulfilled in the coming months, the Italian market will continue the rerating process just begun, which will increasingly see a decrease in the historical country discount which for years the vast majority of listed Italian companies carry with them.
Comment by Massimo Trabattoni, Head of Italian Equity.