The appreciation of the euro will not have a major impact on the Italian market

6 September 2017
Autumn is the time of the year when the market usually seems to head in a direction that it will then maintain through to the end of the year. In the last few month, we have seen the first hints of a recovery, but the trend is not yet definite. A great deal of expectations surround a proper understanding of whether or not there will be an outperformance by securities most closely linked to the recovery of rates, with respect to the classic defensive options that have been winning since after 2008.
On market trends, the possible risk factors consist of exogenous events that cannot be foreseen, particularly political ones, like how the situation in North Korea my unfold, on which it is difficult to track investment scenarios.
As regards the keeping of corporate profits, we are firmly convinced that the context is still positive and shows general improvement. One of the problems will be to understand how the change in exchange rates may impact quarterly results, particularly on some European markets. During these months, the markets that are more focussed on exports have been more greatly penalised in Europe, whilst those with more domestic dynamics, where the exchange rate is entirely uninfluential, including Italy, have enjoyed better returns. In this scenario, which remains positive for us, it is worth pausing for a moment to consider the appreciation of the euro against the US dollar; in the short-term, from the investor’s viewpoint this makes a “loud noise”, but the impact is not always quite as great in reality.
From a micro viewpoint, there are securities on which the dollar may have an impact, but it is also true that the exposure is often hedged and the impact is not necessarily exactly what affects the prices. Clearly, a weaker dollar, where all other conditions are equal, makes access to certain markets more difficult, but three years ago, the dollar reached levels even lower than these and exports did not suffer particularly, above all in the luxury sector, where brand strength somewhat dampens the effect.
The scenarios that change may be risk factors but if well managed, can also become opportunities.
In this sense, rather than prepare forecasts over the GDP, in which in any case there are expectations for a recovery for the Italian part, with figures talking of 1.4%, we believe it useful to take a look at expectations surrounding inflation. A strong euro tends to be deflationary. In these terms, expectations surrounding inflation due to be released by the ECB will prove extremely important for expectations over the medium-term rates.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.