4 June 2019

For Italian companies, results of the first quarter held some surprises, and these were generally positive. Figures for the quarter came out better than analysts’ forecasts, both in terms of revenue and profit, although the reason for this was excessively negative estimates, predicting a general slowdown which never occurred.

Looking in more detail at the behaviour of the various sectors, performance of good-quality and defensive stocks stood out, again supporting the valuation premium on the basis of which they are currently traded, thanks to significant results.

Whilst the scenario is generally positive, there have also been those that caught attention due to negative aspects. In fact, the traditional banking sector recorded weak figures, particularly in terms of net interest margin, due to continuing low rates, and in terms of fees and commission, which suffered from the restrictions introduced by the new MIFID II regulations, only partially mitigated by a low cost of risk, following sales of impaired loans completed in recent years.

Whilst the first quarter brought good news, the second shows signs of a worsening general situation, at least in macro terms, and this leads us to a more conservative approach. As we predicted, increased volatility led to an inversion in market trends, that in May suffered a lot, giving back a portion of the earnings achieved in the significant and unexpected recovery during the initial part of the year.

Escalation of tensions generated by the trade war between the US and China has led to a new wave of uncertainty, creating fears regarding the economic cycle and therefore sales of associated stocks. Furthermore, economic data does not improve this sentiment:

  • in America, figures are lower than expected for retail sales, industrial production and the PMI (Purchasing Managers Index) both for manufacturing and services;
  • in Europa a slight improvement in GDP forecasts for 2019 have not offset disappointment linked to deterioration of the PMI;
  • indications of a slowdown have arrived from Asia, where China has seen worsening in manufacturing figures, despite fiscal stimulation.

On the political front, May saw the European elections, the results of which did not bring great surprises, except in Italy, where a shift in the power relationship between the governing parties was observed. Alongside the trade war, the Italian Budget Law came back into the spotlight, with GDP forecasted to be lower than estimated by the government, which would lead to deficit levels well above the acceptable limit set by the European Commission, with consequent pressure on the spread and on the Italian stock market. This general context of risk aversion was confirmed by German ten-year treasury bonds returning to all-time lows.

In the face of this altered general context, we have changed the Portfolio approach, adopting a more defensive strategy, shortening the position on stocks directly impacted by the trade war and banking stocks that would suffer from worsening in the Italian situation, and giving preference to high-quality stocks, where possible non-domestic.

We remain convinced that greater purchasing opportunities can be found in the world of small caps, populated by companies with excellent growth prospects and characterised by attractive valuations. In fact, with foreign investors still not arriving following the 2018 drop, small caps represent the component where capital should return in the case of market recovery, or which should suffer less, compared to large caps, if markets worsen further.

Interview with Massimo Trabattoni, Head of Italian Equity.