Italian stock market: recovery or flash in the pan?

31 October 2018

The correction on the Italian market that began in mid-September has continued in recent weeks with the presentation of the government budget. It is not so much the extent of the government’s planned deficit that concerns the market, but the nature of the planned measures.

The resulting conflict has affected the Italian BTP/German Bund spread, which has squeezed prices in the financial sector.

Having overcome, with limited damage, a round of rating agency downgrades, the market saw some short covering, driven more by the conclusion of short trades than by the desire to invest. If buying on the market is to resume, we’ll need a medium-term scenario as the basis on which investors can make economic forecasts.

Unfortunately, the correction on international markets has exacerbated confusion in Italy. The US market showed dips due to the hike in interest rates, which seem to be headed towards levels higher than those forecast at the start of the year. Bearing the brunt of this are stocks with the highest multiples, where the interest rate impact is the greatest.

Europe’s biggest problems are tied to quarterly reports, as stocks with earnings in line with expectations struggle to maintain prices while the plunges have been deep for those with negative reports.

We expect a few more weeks of volatility in which the hope of a recovery for the Italian market hinges on the brightening of the political situation.

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