Since the start of the year, all the major global equity indices have shown flat or slightly positive performances: on the Italian market, the FTSE MIB recorded +0.5%, the Stoxx Europe 600 +1.1%, the S&P 500 +2.6%, and the Nasdaq +3% YTD in local currency (total return).
As we write this, reporting season has just begun, the period during which listed companies present to the financial community their results for the fourth quarter of 2023 and, in such a way, their implicit results for the entire previous year.
We are expecting positive figures from Italian banks once again, following much higher rates (and thus interest margins) than in previous years, as well as remuneration of deposits not yet revised upwards. Nonetheless, we believe that the momentum in the banking sector is set to weaken, supported by an expected downturn in the rates for 2024 and, as a result, inevitably more challenging benchmarks for the upcoming quarters. On the other hand, the Italian banking world continues to be closely monitored in light of its speculative appeal, with high potential for sector consolidation which could take off over the course of 2024.
The scenario of falling rates arguably could favour asset gatherers, namely companies that operate in the asset management sector, which, with a gradual normalisation of the rates, would benefit from a recovery in the revenue component linked to commission. In addition, a gradual drop in the rates would contribute to the overperformance on the one hand of utilities, typically over-indebted, which would end up benefiting from a lower cost of debt and, on the other hand, technology, which would see an increase in the current value of its future cash flows, heavily concentrated in the medium and long term.
Since the start of 2024 there have been encouraging signs on the international markets, which are moving towards a recovery in the segment of small and mid-capitalisation companies: the Russell 3000, i.e. the American index of one-third US large caps and two-thirds US small caps, is reaching its highest ever levels. In light of this evidence, we are even more confident that a context with lower rates could reduce the probability of a recession and increase visibility of the resilience of the macroeconomic environment, to which SMEs tend to be particularly associated. Furthermore, an expansive phase in the monetary policy would aid a recovery in the stock valuations of these small and medium enterprises, whose multiples in recent years have experienced a violent and indiscriminate compression mostly due to the sudden upswing in the rates, despite solid and intact fundamentals.
Lastly, 2023 was the first year when it became possible to divest from PIR funds (individual saving plans) without losing out on the associated tax benefits, provided that the investment had been continuously kept in the portfolio for at least five years. This meant that for the entire year now ended, the segment was under constant selling pressure, which we expect to see gradually subside over 2024, allowing this asset class to become attractive again in the eyes of international and local investors.
Commentary by Massimo Trabattoni, Head of Italian Equity