Global indices continue to show negative performance in the second quarter. The FTSE MIB fell by around -12% since the start of the year, faring slightly better than Euro Stoxx (-14.5%), the Chinese indices (CSI -17.5%; Hang Seng -11.5%) and the US markets (Dow Jones -14%, S&P -18% and Nasdaq -27%). This relative outperformance can be partially explained by the composition of the FTSE MIB, which is more exposed to sectors that were not as negative as others, such as banks, and even sectors that were positive, such as oil and utilities. In fact, these three sectors make up more than 60% of the index. Conversely, the sectors that performed worse since the start of the year — technology and retail — have a much lower weight in the FTSE MIB. The trends of the mid and small cap indices such as the STAR, which has fallen by 25% since the start of the year, is further confirmation that in any case, Equity Italia was not spared by the global sell-off.
In the meantime, in the last few weeks the “earnings season” (every three months, large publicly traded companies release their quarterly earnings reports and provide general information on their financial position) for the first quarter of 2022 concluded. Companies reported a strong demand for consumer goods and services. This demand is reflected in increased revenue — for most companies in double figures and above analysts’ expectations — compared to the same quarter of the previous year. Profitability, however, is a very different story. The increase in costs mainly linked to logistics, energy and raw materials is eroding business’ profit margins, which, despite continued price increases, cannot keep pace with inflation. For investors, maintaining profit margins is now the main concern, particularly because many CEOs have given less than reassuring messages about the issues driving inflation in the quarters to come.
The most pressing concerns to monitor include:
While these macro-economic issues are cause for caution on the secondary market, the return of the primary market to the Italian stock exchange after several months of freezing is providing some new opportunities.
By the end of the first half of the year, initial public offers are expected from four companies of a certain size and significance: (i) Plenitude, which is the partial spin-off of the renewables and distribution arm of the ENI Group; (ii) De Nora, one of the leading European hydrogen, hydrolysis and fuel cell technology companies in the world; (iii) Chiorino, a global company which produces conveyor and transition belts; (iv) Selle Royal, a group that owns the leading global brands in the premium bicycle seat sector.
All four of these companies operate on markets that are experiencing structural growth and have a competitive technological advantage that makes their profits sustainable over time. Finally, reasonable valuations should arrive on the market given the recent general repricing of down-valued multiples.
In conclusion, the markets are still at the mercy of negative macro-economic variables that are beginning to have an impact on business’ books. Analysts have already cut the profit and margin estimates for the coming quarters, but there is still doubt that these cuts will be enough. Against this backdrop, identifying opportunities to access the primary market may be a good strategy for increasing returns.
Commentary by Massimo Trabattoni, Head of Italian Equity.