The Italian stock exchange has gained 5.8% since the start of the year, perfectly in line with the performance of Euro Stoxx 50 companies. But if we broaden our analysis to consider the past few years, there remains considerable lost ground yet to recover and – as we’ve been saying for a few months now – we still favor cyclical sectors like financials, energy and industrials for 2017.
However, one new development has occurred, especially in recent weeks. The “Trump trade” is losing its strength and the new US administration’s ability to effectively implement the reforms it had announced has explicitly come into question. One of the most obvious consequences is the flattening of the US interest rate curve, which has helped certain investment areas recover, such as utilities. In Italy and Europe, various stocks – namely Snam and Terna – have returned to peak levels, although with less relative strength than a year ago: in relative terms, they have underperformed the market by nearly 20 points.
In the meantime, data on consumer price trends in Italy and the Eurozone indicate a slowdown. From a certain standpoint, this encourages the European Central Bank to extend its softer stance and possibly lessens the urgency of the debate on tapering monetary stimulus. However, to be frank, I am with those who would prefer to put ultra-expansive policies, consisting of negative rates and massive QE programs, behind us as soon as possible. Think only of the corrosion these policies have caused in banks’ net interest income. In any event, I believe it’s a mistake to look at one piece of data only; much better to focus on trends, and the reflation trend appears to be unstoppable.
Meanwhile, less than three weeks away from the presidential elections in France, tension has progressively diminished. I expect that from the vote on April 23 to the ballot scheduled for May 7, volatility could increase as a result of the consolidation of profit taking. But then, if Emmanuel Macron wins, as polls are currently suggesting, it could trigger the flow of new capital to the Eurozone, including Italy.
Things are beginning to move for PIRs, the individual savings plans that the Italian government introduced in its most recent stability law. I am convinced that PIRs will be a hit, as they will encourage the emergence of a type of investor that Italy has never before seen: the medium to long-term investor. However, anyone using PIRs will need to do so with the appropriate expectations for returns over the medium- to long-term.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.