Business trump politics. And markets are thankful

2 May 2018

Like other equity markets, the Italian market is affected by two macroeconomic variables: the rise in interest rates on one hand and the possible end of the economic cycle on the other. Indeed, major economies have been performing well for several years, so the fear of a turnaround is now constant, although it’s hard to say when the change of course will occur. These factors have led to contradictory sector picking because an interest rate hike, combined with inflation, leads investors to choose cyclical sectors over defensive ones, whereas the fear of economic slowdown leads them to reason the other way around. Tension following the roll-out of US import tariffs was what has triggered the most recent fear of a slowdown, and now that this variable has been added to the pot, the preference for domestic businesses over exporters has returned.

Considering these assumptions, we see how the Italian market’s recent overperformance is the offshoot of the composition of our index, which presents a heavier mix of financial and oil stocks than cyclicals, whose weight is far lower than in other markets. Moreover, the performance of Italian cyclicals is tied to very specific situations (like spin-offs, combinations, etc.) rather than the sector’s global trend. Therefore, in this context, the Italian index outperforms those with more cyclicals in their mix, such as the DAX, which Italy has been outperforming by around ten points since the beginning of the year, and this is despite the Bel Paese’s current political uncertainty, which could drag on for another few weeks. At this point in time, the political situation is not a significant variable, and I wouldn’t even go so far as to call it a risk factor. Even if the country ends up with a technical government, either with a President or broad coalitions until another round of elections can be held, it is unlikely that this would be problematic since markets are focused on other dynamics.

Furthermore, we are at the start of the Q1 reporting season in which we expect positive data for most sectors and securities and hope for good news from banks as well, with plans to reduce the cost of credit and further lighten the load of non-performing loans.

Then, between April and May, we’ll head into the heart of dividend season, another theme to keep an eye on in this market context, in which coupons are frequently recovered within a few days and constitute an opportunity for reinvestment. This means there is still liquidity on the market, and since most dividends will be distributed in May, it might be wise to consider these stocks, since most of the detached dividends could be recovered.

By Massimo Trabattoni, Head of Italian Equities at Kairos, for the “Italian Times” column of AdvisorPrivate.