While the year-end stocktaking was dismal for the Milan stock exchange (-10.2%), 2017 got off to a positive start with medium-term prospects for the rate curve on the rise, benefiting cyclical stocks and potentially reviving the financial sector a little as well.
Moreover, the Monte dei Paschi deal resolved one of the big questions this segment faced when the government measures eliminated fears that, at some point, large banks – including the healthy ones – might be forced to bail out the Siena-based bank. The systemic risk hovering over banks dissipated and now banks are back to being acceptable investment targets, but with a necessary word of caution: be selective.
In politics as well, the scenario is relatively stable: while Italy’s constitutional referendum in December 2016 was the catalyst for bearish positions on the Milan stock exchange, it does not look like the country will have to grapple with challenges of similar scope in months to come. The fact that the no vote did not trigger a new round of turbulence for the Italian market is reassuring, and the valuations of companies listed on the Milan stock exchange have an interesting upside in view of the possible repositioning of portfolios by Italian and international investors.
From a macro standpoint, we’re still seeing the usual hitches: stiff business market, excessively high taxes and substantial public debt, although we don’t expect to see Italian treasury bond yield explode until there are big changes at the ECB.
Europe is still tense with respect to the upcoming elections, especially in France: but the two most probable winners have Europeanism leanings, mitigating the potential threat.
In this context, the first part of the year could be positive, with the trends of the last two or three months of 2016 continuing. The recovery of cyclical sectors in connection with rising rates sped up after the US election and even the Milan stock exchange felt the effect, although the uncertainty caused by the referendum delayed it. This trend could continue in the first quarter of the year, after the new US President, Donald Trump, takes office. It’s worth noting that among cyclicals, earnings estimates have been systematically revised downwards over the past two or three years and forecasts are still relatively low, so we could see the recovery continue. Prices however, will not be low. It is still an expensive market in which stock selection will be key.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.