The Italian share market reaches the finishing line at the end of 2017, having recorded some extremely positive factors which sustained its recovery. These include, in first place, increased Italian GDP above the expectations, a sign that the industrial fabric is in generally good health. The explosion in PIRs (individual savings plans), above the expectations, also played an important role in supporting the Stock Market. The full embracing of Individual Savings Plans by investors in effect opened up an alternative funding channel for Italian small and medium enterprises, with an obvious direct impact also on their prices.
The Italian market also showed some dominant trends in the various phases of the year. Just think of the financial institutions which, up until the end of October were the driving forces in the recovery of the Stock Market, then slowed when the ECB spoke out regarding the theme of more rigid provisions connected with Non-performing loans (Npls) in portfolios.
The absence of a constant concerted drive, combined with delays in the reform of the bureaucracy which Italian companies must deal with, helped ensure the Stock Market did not pass with top marks at the end of year. To sum it up in a few words, “passed certainly, but could have done better”.
The theme of the ECB and Npls will still remain a dominant one in the early months of 2018 for Italian banks. The uncertainty stemming of the criteria for the application of these new coverage obligations established by Eurotower will shape the recovery of the prices of bank securities. The risk is that some banks will need to source capital to cover the new write-downs. A trend that certainly does not represent a favourable prospect for European banks, especially for our banks in Italy, at a time in which, by contrast, US legislation is moving in the opposite direction, towards greater deregulation.
However, more generally speaking, what could the new year be like for the Stock Market? One of the most likely scenarios is that we’ll see a similar trend – but a reverse in terms of timescales – with respect to 2017. Although the year due to close recorded a stellar market in the first part and more uncertain market in the final part, 2018 could see an uncertain start, and then, once leaving behind some sources of uncertainty such as the risk of the recapitalisation of some banks – particularly the smaller ones – and the political elections, could offer a more favourable context for investors. As regards the risks that characterise this market phase, one of the most significant is volatility which is too low. It is a condition that has been fuelled by the fact extremely low interest rates and poor returns on the bond market have led to the “transformation to bonds” of share dividends. In other words, bond investors have occupied a significant part of the equity market on the hunt for dividends. These investors purchase the dividend and not the share. The final result is lower volatility than there should be.
Having cleared this up, will there still be value in the Stock Market following a 2017 which has recorded a clear recovery? The answer is yes, thanks also to the long wave of PIRs and the phenomenon of SPACs which will bring fresh success stories of Italian companies to the Italian share list.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.