25 July 2019

We have passed the six-month marker to unexpectedly find world markets with positive results in double figures. Looking back to the beginning of the year, it would have been difficult to imagine such developments after a challenging 2018 and numerous uncertainties hanging overhead. Global risks linked the trade war and slowing growth combined with idiosyncratic Italian risk linked to less-than-ideal relations with the EU did not make a rally likely.

Nevertheless, the market has overcome its fears and provided a year to celebrate so far. The reasons for this can be found partly in the very proactive approach of the Central Banks. Both the FED and the ECB have given accommodating messages, both ready to intervene with monetary easing, the former cutting interest rates at the first sign of slowing and the latter injecting new liquidity.

At the same time, Italian BTP tensions also eased, contributing to a favourable climate on listings at home. At the beginning of June, Draghi’s words at Sintra, indicating further stimulation if the situation should require it, allowed downward movement of the Italian ten-year rate, alongside withdrawal of the infringement procedure launched by the European Commission due to excess budget deficit.

Now, attention is focused on Autumn, where renewed volatility cannot be excluded. In fact, Italy must face the difficult question of the 2020 Budget Law before a renewed European Commission.

We therefore approach this summer waiting to see how things unfold, remaining short on financials and long on utilities, one of the “winners” of the last year. Regarding financials, the renewed scenario of “permanent” low interest rates, along with continuing possibility of political turbulence, makes this sector rather unattractive, and therefore we prefer not to include it in our portfolio. Meanwhile, following a long period of overperformance, utilities have started to show signs of weakness compared to the benchmark index, leading us to treat them with greater caution, acknowledging that they stand at historical record highs.

Nevertheless, as these represent a possible purchasing target for the world of bonds that now sees increasingly unattractive yields, we prefer to convert the position to derivatives, allowing us to benefit from the upside if they should recommence their ascent. Cyclical stocks, instead, should be monitored with care as, although they offer significant value discounting, they hide profit warnings linked to slowing of the cycle.

Interview with Massimo Trabattoni, Head of Italian Equity.