Proposed government budget shocks markets. Investment opportunities in small and medium caps.

Unexpectedly, the draft budget unveiled by government on September 28, 2018 rocked markets far beyond predictions: while information leaks had led us to expect a deficit of around 1.6%, the government proposal shows a deficit of 2.4%, causing the Italian market to plunge both quantitatively and qualitatively as the proposal includes no investment measures to promote growth.

The market’s reaction to the budget proposal was violent, with an immediate spike in the spread triggering a drop in the equity index. Indeed, the Italian market registered outflows as investors lost their confidence in the new government and the terms of its economic and financial plan, which burdens the country’s books with additional debt, dashing the hopes of the consensus.

On the eve of approval, the hardest hit sectors are the financial sector, whose capital requirements partly depend on changes in the spread, and utilities, a sector that is highly dependent on domestic business.

It will be interesting to see in forthcoming weeks how the country might find a way out of this negative scenario. As usual, there may be investment opportunities, which we are currently seeing in the medium-small cap segment.

By Massimo Trabattoni, Head of Italian Equities at Kairos, for the “Italian Times” column of AdvisorPrivate.