Fluctuations in the spread? It’s financial – not real

6 June 2018

The investment market has experienced sharp fluctuations in recent weeks due to the continuous changes in the political scenario, ultimately resulting in the formation of a new coalition government. At times, speculation overrode fundamentals, partly because long-term investments are difficult in the midst of such political uncertainty. In this context, portfolios grew more volatile and investors were forced to move towards more generally prudent positions.

But we should never forget that it is precisely at times of volatility that the best deals arise. From this point on investors should watch the market with the aim of finding and exploiting these opportunities, since we run the risk of a few more tense trade days. We are, overall, optimistic about upcoming developments in Italy and it is a good idea to identify and bet on now the securities that the market will penalize excessively.

Volatility – which appeared to have dissipated – has returned. Consider only how a mere tweet or social network post can set stocks and markets in motion, and we are going to have to learn to live with this chain reaction in the future. At any rate, Italy finds itself in a very different stage of the economic cycle than it did in 2011, and banks have much healthier financial positions than in the past, although financial market trends could influence the real economy, and even go so far as to stifle growth; indeed, in difficult times like the past few weeks, entrepreneurs are loath to invest in their businesses and tend to postpone investments to the better days that lie ahead. We hope that the real economy is not adversely affected by the financial market in the months to come.

Looking at indexes, we are starting to see opportunities, such as in small caps, although there is a downside to investing in less liquid stocks during this final stage of the economic cycle in which investors prefer more easily liquefiable instruments.

We can use spreads to gauge the amount of tension on the market, but without ever overlooking the real rates that we’re paying. In recent years, the European Central Bank has kept the spread under control, but it has become volatile again in recent weeks: first it was too low, and now it is excessively high. Short-term spikes in the spread are more the effect of financial markets than an indication of the real economy, and we hope this remains the case.

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