After a complicated start, the Italian stock exchange has regained lost ground and is now back in line with the prices seen at the start of the year: +0.75%. The macro scenario – with high debt and an uncertain political situation – does not make buying Italian very desirable. But if you focus on micro aspects, you’ll find that Borsa Italiana is a treasure trove of interesting names.
This year, the winning sectors will most likely be cyclicals: financials, oil and raw materials. Between bail-outs and massive capital increases, the Italian banking problem appears to be behind us, at least for big banks. Around the globe, interest rates are on the rise and this helps interest income and creates some space for profitability. It would be great if Europe could import a little deregulation from the United States: let’s not forget that we went from a near total absence of rules before 2008 to excessive regulations that have effectively prevented the financial sector from recovering.
In the meanwhile, many companies are reporting encouraging results. The mid-cap segment in particular is attracting increasing interest from investors. This is partly thanks to PIRs: the individual savings plans introduced by the Italian government in the last Stability Act to give Italian companies alternative access to capital markets without going through banks, with tax breaks for medium to long-term investors. If flows end up heading to PIRs, it would help reduce market volatility, encouraging a virtuous cycle.
In the short-term, however, international political risk will continue to affect indexes. The widening spread – around 185 bp today – is a signal that should not be underestimated. When the spread between Italy and Germany rises, the market falls. But the strongest trend at this stage is the rally in equities, and this can be seen in the sharp recovery whenever political risk is alleviated. The French presidential election is undoubtedly the most anticipated event: although the double vote system increases the probability of a liberal candidate winning, the experiences of 2016 – i.e., Brexit and Trump – tell us that polls tend to underestimate a protest vote. This is why positions on Europe might soften between today and the French elections, although I imagine there will be some stop and go. I would not recommend taking an aggressive stance, like those who want to adopt bearish positions.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.