Keep cautious as we wait for Draghi

3 March 2016
Piazza Affari, as the Italian Stock Exchange is known, was able to catch its breath for a few days, but only because it fell too much and too quickly in the preceding weeks. Before we see the market take off again, some of the clouds on the macroeconomic front that continue to guide investors’ sentiment will need to scatter: the earnings of listed companies, moreover, show substantial stability, in clear contrast with the Milanese Stock Exchange’s abrupt fall.
At the end of 2015, the market expected Italian GDP to grow by roughly 1.5% in 2016. If this forecast were confirmed, the FTSE MIB could return to above 20,000 points, recovering some 13% over current values. However, another slowdown in growth would create space for additional dips. What remains to be seen are the repercussions that the current stage of uncertainty has had on consumption and entrepreneurs’ willingness to make new investments: indeed, investments are the fuel that the recovery is missing. Without investments, the relief offered by the improvement in consumption might only be temporary.
In the meantime, pressure on the European financial system explains why Milan is the worst European stock exchange since the start of the year. Markets are hanging on the words of Mario Draghi. What measures might give a little boost to the most penalized sector in this disappointing start-of-the-year? If the European Central Bank does no more than announce additional cuts to the official deposit rate, the financial sector would react negatively, because this would add pressure to interest rate spreads.  However, if the ECB shows willingness to purchase notes issued by the banking sector as part of quantitative easing, stock markets might applaud the new shock treatment. Investors should continue monitoring oil prices and the Euro/US dollar exchange rate as well. In the past week, both of these benefited European indexes, but if they were to change course, pessimism would soon return. 
In the meanwhile, as we expected, cyclical industrials recovered a little lost ground on Piazza Affari. But it is still too soon to say for banking securities: better wait for Draghi’s speech.
By Massimo Trabattoni, Kairos Manager of Italian Equities, for AdvisorPrivate’s Italian Times column.