From the beginning of the year, the FTSE MIB has recorded double-digit growth and in the same period, the small and mid caps of the Italian stock market stood out with even stronger performances.
It follows that this investment theme remains interesting and, according to Massimo Trabattoni, Head of Italian Equity, concerns those companies with sustained growth potential, which are provided with leverage for further development. “It is true that these companies have benefited from low interest rates but, due to their capital structure, often they are not able to self-finance and therefore have to raise equity from the market in order to grow and develop” explained Trabattoni. However, it is essential to be selective because valuations have risen greatly and in several cases the margins for new hikes have dropped significantly. This also applies to stocks that are now benefiting from positive momentum for their sector, but which could discount much less favourable valuations in the event of a sharp rise in interest rates.
A dynamic, the one just described, which does not seem to affect the solid prospects of sectors linked to infrastructures, thanks mainly to the substantial investment plans envisaged by the Next Generation EU, implemented in Italy through the recently approved National Recovery and Resilience Plan (NRRP) in Brussels.
Energy infrastructures will in fact be favoured by funds earmarked for upgrading grids to be able to manage energy produced with renewable technology and to meet the demand that will get an additional boost from recharging automobiles, as the number of electric cars is growing.
“Even in these cases, however, we should observe the evolution of interest rates. A structural increase in market rates usually has negative repercussions on companies that make greater use of debt, whose valuations may be affected” explained Trabattoni.
Speaking of infrastructures, another interesting chapter concerns telecommunications towers. The transition to 5G technology is historic and requires huge investments, but it also outlines very positive prospects for operators in the sector, especially in the medium term.
Looking at the composition of the Italian stock market indices, we note an important share of cyclical stocks and sectors, in particular financials. “In the phases where the stock market is positioning itself on the theme of interest rate hikes due to higher inflation expectations, financial stocks tend to perform better than average. However, the model of most Italian listed banks still presents pitfalls because it sees increasingly stronger competition, especially on the side of new finance (fintech), which has fewer structural costs and offers increasingly smart services. For this reason, banks must accelerate mergers, streamline and try to reduce inefficiencies to a minimum in order to remain competitive”, commented Trabattoni.
The rise in interest rates can also be a positive element for insurance companies: “The structure of insurance companies is comparable to banks, perhaps only a little less regulated than the strict limits imposed on credit institutions, but the insurance model is also one that is continually threatened by technological evolution” he added.
As for growth stocks, Massimo Trabattoni believes that the litmus test will come with second quarter profits. “It’s still early days as we don’t have any profit announcements at the moment. But from our talks with companies, the feeling is that there may be some positive news from the quarterly reports, and the stock prices of the last few weeks would seem to be going in this direction. On the other hand, Italy remains at the centre of international focus, with investors (including foreign) who seem to want to give credit to the change of pace that awaits us”.
Interview with Massimo Trabattoni, Head of Italian Equity.