Momentary volatility with room for recovery

1 February 2017
It’s news to no one that politics affect the BTP/Bund spread, as we’ve seen in the past few weeks with the debate about whether early elections will be held: the spread rose to 184 bp, levels last seen in summer 2014. The current news from Greece, which isn’t very reassuring, has certainly not calmed concerns.
However, the current scenario keeps us from getting a clear view of individual companies’ fundamentals. If you consider the Milan stock exchange as a basket of individual companies, there are many names worth buying. But if you look at it like the stock exchange of a country with enormous public debt, the picture is much more complicated. 
I am confident: I believe that the negativity we’ve seen in the past few days could be fleeting. There is room for recovery, at least in the first half of the year. Let’s not forget that the recent bail-out of Monte dei Pacchi di Siena is a significant discontinuity factor: the fear that, at some point, large banks – and the healthy ones first – might be forced to bail the Siena-based bank out vanished thanks to the government’s measures, containing contagion risk. Banks are much sounder than they were two years ago. The market has even substantially absorbed Unicredit’s first capital increase, net of a few cases of volatility. And the favorable trend in interest rates, which began in the United States in the second half of the year, has started affecting the European curve. It is no coincidence that since October the most penalized sectors have been utilities and telecoms, which are the most exposed to rising interest rates. 
I believe that the rollover to the cyclical sectors – financials, oil, raw materials – could consolidate in the first half of the year in a substantially positive market context. It will be less favorable for defensive stocks that, moreover, have widely overperformed in the past five years. 
In the meanwhile, only a few short days after Donald Trump took office, the new administration has already given us a number of issues to consider, and more could come. Overlooking ideology, if we take a market perspective, the new president will at least offer a clear, straight line, and neither the large multinationals that do business in the United States – take the FCA Group and its CEO, Sergio Marchionne’s recent statements for example – nor investors can ignore this fact. The French vote, one of the most important events of 2017, has not yet hit markets’ radar, but for the time being, the patent Europeanism of the two frontrunners, Fillon and Macron has mitigated risk. Barring any surprises.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.