The capital increases of certain Italian banks, including large banks, will soon be put to the test. If Italy’s constitutional referendum on 4 December passes, it could smooth the way for these increases, whereas a potential “no” vote might complicate matters by fueling political instability. Although efforts are underway to soften the blow of a potential “no” outcome, the government’s reputation would inevitably suffer if voters were to go against the Prime Minister’s stance.
Assuming that the outcome is “yes” and the capital increases go through faultlessly, in the short term, investors stand to enjoy a mini-rally, benefiting from short covering on positions set up to perfection in previous months by those who bet on catastrophic conditions for Italian banks. However, we should probably be considering whether, in the medium to long term, investing in banks will give us attractive returns or not. With zero interest rates, profit margins under structural pressure and stifled GDP growth, the question answers itself and so we are privileging other sectors, at least until the banking sector’s coordinates change.
In any event, there is hope that growth will remain steady and that Italian GDP will be able to stay around the 1% threshold. The only bad news that bank prices are not yet showing is a slide into recession, and this would be terrible news.
There are still opportunities to be had in the financial sector. We are positive, with reason, about themes that are directly or indirectly benefiting from difficulties in the banking sector: for example, securitization companies or those that buy non-performing loans. The asset management segment continues to hold our interest, as it generates lavish fees, does not absorb capital and could set the stage for potential business combinations. Nevertheless, let’s keep in mind that mergers in this segment are never easy: while synergies on the product side are relatively easy to find, the integration of the distribution networks might prove to be very complex.
On the Milan stock exchange, we are leaning towards industrials with global exposure. We also like certain luxury players that adopt the made-in-Italy model. Energy could be another area to keep an eye on after OPEC’s pseudo-agreement in Algeria last week. I do not expect oil prices to flare up, but the fact that leading crude oil producers have resumed talks is an undeniable source of support.
In the background, the upcoming US election is beginning to hit investors’ radar. The 8 November vote will keep many waiting with bated breath. We might see a rise in volatility over the course of the next few weeks.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.