We saw how the election outcome proved to be “no problem” for the Italian financial market, which held to the trends of other markets. Sure, the drop was steeper for a couple of days, but the market promptly recovered in the days that followed, in part thanks to the positive economic cycle and action by the ECB to keep the spread safe from pressures. Tensions between the USA and China over tariffs have had a negative impact on markets, but on the positive side they are likely to create greater unity within the European Union, mitigating anti-European pressures—even the Five Star Movement and Northern League have moderated their stance on the idea of leaving the Eurozone.
Against this backdrop, the upward trend in interest rates in the medium/long-term has continued, which leads to favour some sectors, such as finance – especially banking – rather than others, such as utilities. This underlying trend combined with the tariff issue, however, will have an opposite effect, penalizing consumer discretionary and benefiting domestic industries over export sectors. This is a period of confusion in sector-level trends for the market, and the effect can be seen in alpha generation. With volatility back on the rise, the market appears to be looking for correction, hopefully without any extreme shifts.
From a technical analysis point of view, we are currently in a distribution phase, the last phase of the impulse waves. A correction may therefore be necessary in forthcoming months, but that does not mean good returns cannot be obtained in this phase. As concerns the banking sector, one of themes to keep an eye on in the coming months will be the start of a banking M&A season, which will affect small institutions first and foremost, with a view to cutting costs and improving business efficiency, now that NPLs are no longer a systemic risk.
By Massimo Trabattoni, Head of Italian Equities at Kairos, for the “Italian Times” column of AdvisorPrivate.