Looking back, we see a market that performed, overall, positively, partly because of its successful search for a tangible solution to the Italian banking situation. This led to a turnaround in the negative trend that had begun at the end of 2016 and heavily affected the main Italian equity index, notorious for its exposure to the financial sector.
There is no doubt that the biggest event characterizing the half year just ended was the creation of PIRs, the individual savings plans that led Italian small caps to outperform large caps. However, we are now entering the market’s summer phase, which could momentarily interrupt the trend.
US rates began to rise in July 2016, and this was accentuated by Donald Trump’s win. The Trump effect has now completely subsided, but the underlying trend, with the Fed’s stewardship, continues to point towards a recovery in interest rates. This is the element to consider when building medium-term portfolios.
In this scenario, a risk element for markets, which discounts extremely high prices, could come from a potential interest rate revision unaccompanied by growth in earnings. This could lead markets to adjust significantly.
I personally believe that we will see a lateral phase on markets this summer, with the positive trend resuming in the fall, the performance of earnings remaining sound and a recovery in the banking segment in particular. Indeed, from now to year end, the recovery of bank multiples could be a dominant theme for the Italian market, thanks to diminishing regulatory pressure.
At the same time, I do not currently foresee any major political risks. This remains the Italian market’s largest factor of uncertainty, but it could be a more significant issue next year.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.