Italy shows encouraging signs

14 December 2016
We are nearing the end of a year in which Italy was penalized by a general lack of confidence in domestic assets.  Despite the recovery seen in the past two weeks, the Milan stock exchange has lost 12% since the start of the year, ten points more than the Eurostoxx50’s disappointing -1.35%.
 
What lies ahead? First, political risk has diminished considerably: we have a new government that will ostensibly remain in power until the end of 2017.
 
The recovery of cyclical sectors, which began some time ago in Europe without Italy benefiting from it initially, is finally facilitating a recovery. 
 
Furthermore, the solution for distressed banks is at hand: regardless of the path taken to complete the imminent capital increases, systemic risk will, in any case, be averted and the biggest threat that has kept investors awake at night for awhile will therefore vanish. However, investors will need to learn how to rapidly adapt to a constantly changing scenario: when an event that constitutes a potential risk factor is overcome, it is taken off the board and the portfolio must be adjusted to the new situation. We saw this with the US election, where the most effective reaction to the Republican candidate’s surprise victory was not to sell, but to build a Trump portfolio, i.e., one that can perform well in the new context. 
 
Going back to the Milan stock exchange, while we have had a very negative outlook until now, a few positive factors are currently giving us reason to send a more reassuring message. The introduction of individual savings plans, known as “PIR” in Italy, should attract new flows to the country. Institutional investors’ significant underweight in the peninsula should lessen, precisely because the systemic risk factor associated with banks is subsiding. After a period characterized by too much confusion and no clear picture of what the future holds, the right conditions are finally arising to resume the generation of alpha beginning in January.  
 
Current market trends continue to be dictated by flows, which are feeding the enormous valuation gaps. The phenomenon is widespread across all sectors: from banks to cyclical segments. This situation highlights a few opportunities for buyers in Italy. In the meantime, the European Central Bank’s support remains a mainstay. Last week, Mario Draghi announced the monetary stimulus plan would continue until the end of 2017, although the amount of acquisitions would be cut from 80 billion to 60 billion per month, beginning in March. Definitively, this was a gentle way of saying that sooner or later, the stimulus must be tapered. However, it’s still early to think about that. This theme might hit investors’ radar mid-year, but until then, markets can keep enjoying Frankfurt’s support. 
 
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.
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