Piazza Affari ready for the year end party

4 October 2017

Just one last little push, and it’s done. There is just one quarter – the one we’ve just started – left for the Italian stock market to be able to celebrate the year 2017 which, until now, has seen a significant recovery. The presence of a series of factors supporting the market as a whole makes us confident in a positive end to the year.

First and foremost, the economic environment. The most recent data relating to Italian GDP not only provide a snapshot of an economy that continues to be reinvigorated, but even outperformed expectations. This enables us to look with optimism – and this is a second positive factor – at the new round of corporate earnings relating to the third quarter of 2017, which listed companies will announce in the coming weeks.

However, as usual, several risk factors need to be taken into consideration. These include political risk in Europe, although the current positive economic momentum is attenuating tensions that could arise in the background of markets and does not leave much wiggle room for speculation, which in other phases of the economic cycle would have had an easier time.

By the sound of things, there are other factors playing in favour of one last push for the Milan Stock Exchange, such as the presence of sectors that can drive the FTSE Mib at least until the end of the year. First of all, the banks. On one hand, Italian banks are not very exposed to the exchange risk represented by the strong euro, and on the other hand they are directly benefitting from a more robust economic context in which the recovery is easing tensions regarding substandard and non-performing loans. And that’s not all. Several financial securities are still trading at a significant discount, at 0.5/0.6 times their book value. And we have not even mentioned the expected improvement on the earnings front. For this sector, one risk may consist of any unfavourable regulatory amendments, the impact of which could extend not only to the sector but also to the economy, because they could translate into a decline in lending, for example.

Aside from banks, in the Italian market there are other significant topics that can contribute to a further expansion of the Milan Stock Exchange, representing possible objectives of a sector rotation, typical of a bull market phase like the current one. This is the case, for example, of some oil securities.

In addition, we should not overlook that the topic of individual savings plans remains hot. Flows towards the most important mid and small-cap securities remain naturally sustained. But today we prefer to approach individual savings plans with careful selectivity in stock picking, aiming for the best companies from a long-term perspective, rather than taking a short or medium-term view, also in order to limit the overall risk in the portfolio.

So where may the FTSE Mib go in the coming months? The index seems to be on the path towards the target of 24,000 points, a level which it may come close to once it manages to definitively surpass the 22,800 mark.

By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.