“There is a window of opportunity for the Italian market to rise in the first months of the year”. This is the opinion of Guglielmo Manetti, deputy general manager of intermonte Advisory who oversaw a detailed study on the prospects of the Italian market in 2017, with which we begin a round of opinions among investment houses.
“Having analyzed the main variables and the drivers of the stock market - says Manetti – we see more upside possibilities than downside risks especially in the first few months of the year, where political interference should be less. While we know the downside risks quite well, the rationales supporting a more positive view are, in a nutshell, the following:
– The Italian market is very little present in international portfolios and the short is still quite present
– The main political risk, represented by elections that bring the 5 Star movement into government with possible anti-European initiatives, is mitigated by the discussion on electoral reform. We therefore do not expect elections in the first quarter of 2017 – the upward trend in global rates should also benefit Italy
– We expect GDP growth next year around 1%, synchronized with global growth – The market's earnings direction should benefit from an easier comparison in the first part of the year on different variables such as rates, currencies and energy price
– Market valuations are discounted by around 15% on a P/E basis. On this basis, if we think that the market can return to trading close to its historical average P/E, and above all that there may be a rotation between winning themes of the last few years (utilities, luxury consumers, growth and mid-small caps in general) towards much more old-fashioned themes such as financials, oil and telecoms.
"UNDERWEIGHTED" BUSINESS PLACE, VICTIM OF THE DISCOVERY
In support of this analysis, Intermonte notes that:
– The Italian market comes from years of significant underperformance compared to all European and global markets apart from the Spanish one (-3,5%). 2016 is closing with a drop of around 10%, despite having recovered almost 15 percentage points from the lows. In 2016 Frankfurt increased by 7,8%, Paris +4,35%.
– Furthermore, if we also look at the gap accumulated in recent years in terms of relative performance compared to the rest of Europe. we note that in the last year the sectors that have done worst are banks, insurance companies (-10,8%) and telecoms (-11,6%) - while the winners in relative terms are capital goods, cyclical industrials and real estate.
– Not surprisingly, after such an unsatisfactory performance, investors are now very underweight in the Italian market. In this regard, notes the analyst. “We analyzed the shares outstanding on some of the most popular listed ETFs, i.e. the measurement of the quantities of shares outstanding. To date, the average number of ETF shares is about 50% lower than the most recent highs of March 2015-
– The overdraft is also very strong. From the list of shorts published by Consov it emerges that "from the lows of the Italian market last February to the beginning of December, the percentage of shorts has increased by 30%". But the figure is probably higher because the Consob data do not capture positions below 0.5% of the capital. “especially for large capitalization companies – reads the report – we do not believe it is an exhaustive measure of effective short positioning. In addition to the shorts on individual stocks, synthetic products (ETFs) or derivatives (futures or options) on the Italian index are added, which further escape this analysis. Also for this reason, the market trades at a 15% discount compared to the historical average of the price/earnings ratio at one year,-
After several years of asynchronous growth (or decline) across regions of the world, 2017 should finally be a year of synchronized global growth, with the world seen growing by 2.5%-3.0%. The USA and various emerging countries are expected to grow above the world average, with Europe still below average mainly due to the UK and the post-Brexit effects.
POLITICAL RISK IN THE SECOND PART OF THE YEAR
Political risk was probably the characterizing element of 2016. "Our basic case - writes Intermonte - is that the current government is working on a solution relating to the electoral law, also in the wake of what the Constitutional Court may say at the end January. From this point of view, we see a greater than 50% probability that the elections will be held in the second half of the semester (June?) and less than 50% of an acceleration compared to March. We believe that the main risk that may be perceived by the market, i.e. a 5 Star majority government with new elections, may be mitigated by time and by the outcome and form of the new electoral law. From this point of view, we see a relatively more “quiet” first quarter on the Italian political front, with the other main European appointments (elections in France and Germany) towards May and September”.
THE RISE IN RATES IS ALSO GOOD FOR OUR BANKS
Decreasing role of central banks
As far as monetary policy is concerned, 2016 will be remembered as the year of maximum compression on market rates due to the action of the ECB but also as the year in which the effect of the purchase plan, after the peaks recorded in the month of August showed the rope
Looking at 2017, it seems that the upward trend in long-term rates is destined to continue but in a short time horizon (in the next 3 months) it is more probable that a phase of consolidation will develop around the current levels. Italy risk in particular could return to investors' radars with the approach of a possible call to vote for the renewal of Parliament in spring/early summer 2017, closer to the long-term historical average level of around 300 basis points.
The ECB not only represents monetary policy, but also and above all as regards our country, the supervision of the banking system.
What to expect for 2017? There will certainly be the tail end of the restrictive approach which should be completed with the capital increase of Unicredit in January and with the intervention of the State in the restructuring of the banks in difficulty. However, a less punitive attitude can also be glimpsed.
For the credit sector, the expected rise in interest rates will play a significant role, linked above all to rising inflation expectations. The correlation between the steepening of the yield curve, linked to various factors, certainly including an increase in the expectation of short-term inflation, and the credit trend is evident. The movement, which started in an important way in the USA, should continue to benefit the Italian banking sector in the first part of the year, also thanks to an easier comparison of the oil price in the first quarter and consequently with the potential growth of inflation, while in the second half of the year the comparison should become less favourable, barring a further marked increase in the price of energy. In conclusion, a more benign scenario on rates, linked to expectations of inflation growth and not to yet another increase in the Italian risk premium, should benefit the Italian market, and in particular the financial ones, to the detriment of the more interest sensitive sectors.
MORE EQUITY THAN BOND...
The rate movement should help reverse at least in part the enormous flow of assets that are currently still in the bond market, also helped by a growing activism of the Fed in this sense. Clearly Italy should be a small beneficiary of a trend in favor of equities, but given Italy's very low level of invested assets, even a marginal increase could be good news. Furthermore
THE RETURN OF M&A
The year is closing with speculation on Mediaset which is capitalizing on the market's attention. In reality, 2016 was a less lively year from the point of view of M&A compared to 2015, which saw important transactions involving even large companies such as Pirelli, Italcementi and World Duty Free. We believe that, despite all the political difficulties (or perhaps also thanks to the fact of having a relatively "weak" government like the current one), there could be a return to M&A in 2017 which could even involve the financial sector as well, after the strong strengthening balance sheet of the sector in recent years and within a more favorable scenario on the interest rate front. We therefore think that within an Italian equity portfolio there should be room for a group of stocks that can benefit from M&A.
PIR, A CHANCE FOR SMALL CAPS
Better large caps or mid small caps on the Italian market? The answer to this question largely depends on the sectors that will perform. If, as we believe, the value vs. growth trend continues in the first part of the year, sectors such as financials and energy will benefit, less represented in the mid-small caps segment. .
In any case, beyond these considerations, we believe that the mid-small caps will continue to give investors excellent satisfaction also considering the more international vocation of these companies, a positive correlation with the dollar and, more generally, a good exposure to that synchronized global growth that we expect at least in the first part of the year.
Furthermore, the awaited launch of the Individual Savings Plans (PIR) introduced by the government in the latest stability law should encourage and direct new savings flows towards this sector. In fact, the new legislation provides for significant tax savings for those who invest for a minimum period of 5 years in particular products (funds, management, life insurance policies, etc.) which must necessarily have a not very low percentage (at least 21% of the total) invested in companies not part of the FTSE MIB. “We expect – concludes the Intermonte analysis – therefore a positive contribution for the mid-small caps sector reasonably starting from the second quarter of 2017.
