Performance and growth: the post-pandemic

26 October 2021
Italian Times

The Italian market continues its rapid increase with good performance. In particular, amongst the main European indexes, the year to date performance of the FTSE MIB, net of dividends, is second only to that of the CAC 40, at approximately +18% and +20%, respectively. However, the year has been even more positive for small and mid caps, as can be seen by the roughly +35%/+40% recorded by indexes like the MIDEX and the STAR.

There are three primary phenomena that help to explain this:

  • the excellent profit and loss results of companies that benefitted from the post-Covid-19 recovery, which have therefore demonstrated their resilience, both in Italy and in other G7 countries;
  • the rerating on Italian equity, which historically has always traded at a large discount compared to European equity and is finally closing the valuation gap (also thanks to the excellent returns on the BTP, which for many months now has been at around 100 bps from the Bund);
  • the renewed interest of foreign investors, both active and in terms of passive allocation, in our country within global portfolios, and which as a result have brought new inflows.

The deep origin of all three of these phenomena lies in the benefits that the Draghi government, also supported by NRRP funds, is providing to the Italian economy and to the country as a whole. Indeed, aside from thousands of public projects, private sector incentives and public-private partnerships which in and of themselves already stimulate domestic GDP and will continue to do so over the coming years, structural reforms like that taking place in the justice system and the Public Administration are also expected to drive overall economic growth.

At the sector level, we are also continuing to see an overperformance of energy and banking, sustained by favourable macroeconomic winds due to an increase in inflationary expectations, monetary tightening by the Central Banks and the ensuing rise in interest rates. The automotive industry on the other hand is suffering, as it has not yet managed to overcome the semiconductor shortage, which is preventing manufacturers from meeting current market demand. These lower sales volumes could influence the turnover of companies which, for the moment, have stated that they are capable of maintaining, if not even increasing, their profitability by raising prices and through a mix effect (i.e., by boosting sales of high-range models).

The performance of other sectors is a bit more sideways, with Spanish utilities under special observation after the statements, which were immediately retracted, regarding cutting the compensation of sector companies in order to at least partly offset inevitable higher bills for consumers. Italy on the other hand opted to immediately make government funds available to make up for rising gas and power prices, without allowing these increases to be passed on to consumers.

As regards Covid-19, it is possible to affirm that finally after many long months in which the pandemic was the primary concern of the Stock Exchanges, it has ceded its top position to fears regarding inflation. The contagion numbers relating to the fourth wave are relatively low, and hospitalisations are limited thanks to the vaccination campaign. The market is currently not expecting any additional restrictive measures to be imposed on a national scale, but rather a gradual return to normal, with the travel and tourism sector recovering to 2019 levels in 2023-2024.

Many traces of the pandemic can surely still be seen in the choices and habits of consumers and companies, first and foremost in the strong drive towards the digitalisation of goods and services.

Comment by Massimo Trabattoni, Head of Italian Equity.