This August, all the major global equity indices are showing negative performances: on the Italian market, the FTSE MIB recorded -4.6% (+22.8% YTD), the Stoxx Europe 600 -3.4% (+9.3% YTD), the S&P 500 -3.2% (+16.8% YTD) and the Nasdaq -3.8% (+38.6% YTD) in local currency (total return).
Recent negative equity performances are mainly attributable to growing concerns harboured by investors around the evolution of inflation and the resulting likelihood of a slowdown in the economies.
The correction in recent weeks shows how the stock markets are also beginning to fear that the abrupt cycle of rate hikes could result in a recession albeit countering unprecedented inflation: an eventuality that the bond markets had already considered for some time, as confirmed by the inversion in the curve of 2-10yr American rates since the start of the year and which the stock markets are also beginning to watch.
These fears come after very strong numbers recorded by global stock markets since the start of the year. On the Italian market, however, it should be noted that the strong performance is mainly attributable to the overperformance of banking stocks, while the remaining stocks were left far behind. This divergence in performance is even clearer when comparing the universe of large caps with that of mid and small caps, with the former enormously outperforming the latter: since the start of the year the FTSE MiB has achieved +22.8%, compared to +5.8%, -4.5% and -3.7% of the PIR, AIM and Star indices respectively.
Therefore, prospectively, the approach to be adopted from September onwards will be marked by greater prudence and caution, as we await better visibility of the strength of the economic cycle between now and the end of the year.
The upcoming months will most likely offer good opportunities to increase exposure to small and mid cap companies given the extremely discounted valuations these stocks are currently seeing: to this end, the fundamental analysis will play a crucial role in identifying the companies recently penalised by the indiscriminate compression of the multiples triggered by abrupt rate hikes on the one hand, but whose fundamentals remained solid and therefore lead us to believe that they might continue to deliver the results expected by investors.
Therefore, it will be a case of increasing exposure to the stocks expected to have an interesting performance over the next 12 months: these are quality companies with solid financial results that were able to overcome the recent inflationary pressure and supply chain upheavals thanks to the resilience of their margins and that are often market leaders within their operating niche.
Commentary by Massimo Trabattoni, Head of Italian Equity.