The crisis is not over, but the tide has changed on the markets. The marginal effect that the Greece case is having on the stock markets also proves it. This is the opinion of one of the most attentive and refined protagonists of the Italian financial industry, Paolo Basilico, founder and big boss as president and CEO of Kairos, the asset management company that ten years ago introduced Italians to the positive face of hedges. According to Basil, there are several elements that combine to support the rise in the stock markets: the Draghi effect with the liquidity injected into the European banking system, the signs of recovery in the American economy, China's more accommodating monetary policy. “The rise – observes Kairos' number one – will probably last until the rebalancing and repositioning of investors is completed”. That is, for at least six months and perhaps for all of 2012. Here is the interview granted by Basilico to FIRSTonline
FIRST online – During the crisis, forecasting the economy and the markets has become even more difficult than usual: crisis management reserves surprises every day (Greece, Portugal, rating agencies) and market volatility is high. The fog remains thick, but since the beginning of the year the stock markets have been all positive and for a few days even foreign investors seem to be rediscovering the Eurozone and even returning to buy Italy: are these ephemeral signals or is the wind changing on the markets?
BASIL – The markets did not rise on the usual optimisms of the beginning of the year but on concrete events that occurred between November and December 2011. The intervention of the ECB better known as LTRO, the growth data of the American economy certainly higher than expected and the first signs of monetary easing in China, which were recently followed by similar statements by Bernanke. These events, all in some way improving the economic-financial picture, occurred with an extraordinarily cautious positioning of investors due to the deep fears of 2011. The result of this combination is the rise we have been recording in recent weeks. It is therefore not something ephemeral and will last until this portfolio rebalancing has been completed. Right now it's no longer rational to have a portfolio that discounts an impending eurozone crisis and its global deflationary consequences, even though everything still remains fragile.
FIRST online – Italy and the euro have been the epicenter of the crisis in recent weeks but now it seems that the markets smell the salvation and rebirth of Italy and the single currency: is this an accurate impression? And how important is the action of the two Super Marios to get out of the crisis?
BASIL – Among the facts described above there is no doubt that the ECB's intervention was the heaviest in terms of concrete effects. Monti brought back a primary asset to our country, which is credibility and trust. But it must now demonstrate that it is also able to give us back economic growth without which we risk a path of slow but constant impoverishment of industrial and financial resources.
FIRST online – Even politics can sometimes surprise us: did you imagine that the Monti government could implement reforms that Italy had been waiting for for twenty years and could recover so much international credibility in a very short time? How do the Milanese financial community and the Italian financial industry live and what do they now expect from the Monti government?
BASIL - I believe that the issue of work is central to understanding if we will be able to return to being competitive. If I had to indicate the key objective expected of Monti in this phase two, this is it. It is no coincidence that it seems to me that the Prime Minister is spending a lot and personally on this point, receiving criticism that is widely awaited but undeserved in my opinion. This is the decisive match for Italy.
FIRST online – The ECB's unlimited injection of liquidity into the banking system seems to indicate the definitive way out of the crisis: it is said that a bazooka plan against sovereign risk would be enough and that the new state-saving fund or the ECB would announce the possibility of unlimited interventions in support of government bonds of the most indebted European countries to stop speculation? What is your opinion and do you think the Germans will be convinced in good time after the fiscal compact?
BASIL – With LTRO we have eliminated the default risk of some European banks, even large ones. It's not little. But the governance of the Eurozone is a complex system, in which there are still mechanisms (see EBA) that can be destructive. The crisis has certainly been postponed but it would be illusory to think that it cannot recur. Unfortunately I do not expect pro-European visions of Merkel between now and the elections. We have to do a lot ourselves and hope that the American economic recovery will give us some breathing space to buy time.
FIRST online – Last year America – both on the stock market and with its bonds – was a safe haven for savings even in a year of global crisis: will it be the same in this election year?
BASIL – Yes, I think so. From a risk and volatility point of view it seems to me the safest market. From a performance point of view, 2012 could be different, because there are many stock markets around the world, from Italy to China, which could benefit from a much more significant mean to reversion if the year continues to be "normal".
FIRST online – How does an innovative and independent asset manager like Kairos orientate himself in asset allocation in such an uncertain moment?
BASIL – We focused on some bond areas and more generally we too rebalanced the risk of our portfolios to the new situation. But we keep the principle of prudence and diversification high because everything is still too uncertain to orientate the asset allocation on a single scenario. We have approved a fund called Valore Italia. A 3-year closed-end fund with private equity-type commissions, i.e. moved to the moment of any capital gain by the investor. It is especially designed for investors and is clearly a bet that Piazza Affari can recover some of the huge ground lost since 2000.
FIRST online – He does not believe that the disruptive presence of the algo-finance of the HFTs (i.e. of the high frequency traders, the new, powerful but unknown masters of the Stock Exchanges) who leverage algorithms that regulate computers and ultra-fast trading makes the markets even less democratic and holds savers away sowing distrust? Isn't it time to adjust them?
BASIL - Absolutely yes. It is surprising how little has been done to improve the functioning of the markets. This creates the risk of populist political interventions, such as the Tobin Tax, which I believe are wrong but which feed on anti-banking and anti-finance sentiment. In America they have to open the dossier on the reform of financial market operators and instruments, but whatever happens, we'll talk about it after the elections.
FIRST online – Back to Piazza Affari, Benetton's delisting has the flavor of a shock: is it the end of a dynasty or of the Italian Stock Exchange?
BASIL – Benetton's delisting is another facet of the crisis we've been experiencing since 2007. On the other hand, if all the political attention remains on sovereign debt we cannot be surprised if the capital markets will be reduced to the bone, at least in countries like Italy. If then this is compatible with a country that has to start growing again…
WHO IS BASIL
Paolo Basilico is Chairman and Chief Executive Officer of Kairos. After many years of experience gained in leading Italian financial companies, such as Banca Manusardi, Mediobanca and Giubergia Warburg – where he held the position of managing director from 1991 to 1999 – he founded the Kairos group in June 1999, with the aim of creating an "alternative route" to the large asset management industry.
Kairos is today one of the very few independent companies in the sector, a group with 115 employees, 7 partners, offices in Milan, Rome, Turin and in the main international financial centres. For 5 years the best management company in Italy according to the Extel international survey, Kairos manages a total of 5 billion euros.
