Portfolio choices: going beyond a mere price approach

23 February 2022
Italian Times

The year has gotten off to a complicated start for equity and bond markets alike. Inflation concerns are growing, with economic data showing unabated price increases in the US and Europe, driven mainly by consumer staples and especially energy. As a result, the Fed announced the first substantial rate increase for 2022, with the central banks following suit. Goldman Sachs estimates seven 0.25% increases in the US from March and two similar rate hikes by the European Central Bank starting from November.

In addition to macroeconomic pressure, there are also geopolitical tensions over the intensifying conflict between Russia and Ukraine in the Donbass region. Russia is threatening a large-scale invasion of the entire Ukrainian territory and has even targeted the capital Kyiv, while Europe and the US are continuing diplomatic efforts to find a peaceful solution.

On the domestic political front, Italy has survived the presidential elections unscathed, with the parties opting for a second term for Mattarella. This outcome confirms the strength of Draghi’s government. With talk of a premature end to the mandate now silenced, the administration will most likely come to its natural end in 2023, thus allowing the Prime Minister to complete the planned structural reforms and the NRRP-funded investments.

As for the micro scenario, the reporting season has begun, and companies are announcing their results for the fourth quarter of 2021 and also for the full year just ended. What we have seen so far is a market ready to severely penalise even the smallest errors. Upward spikes have been rare, even for those who have experienced growth. The financial and oil sectors have reported the best results. One thing we have seen across many companies, even in different sectors, is increased raw materials costs. Personnel cost increases are currently less of a concern, although the issue is already significant in the United States.

Given how volatile and congested the market is, we suggest looking afresh at the companies in the reopening world whose price action has lagged in recent months. The advice is to go beyond a simple analysis of multiples, which obviously does not reflect the value of companies at a time when low volumes have made it difficult break even.

Commentary by Massimo Trabattoni, Head of Italian Equity.