A positive start, favored by the good performance of the economy, as emerges from the latest Istat data and from the recovery of loans in the Eurozone. A trend that could last until spring, driven by US euphoria, if Donald Trump's promises translate into immediate fiscal stimuli, and by the weakness of the euro, to the advantage of European industry. But it won't be a linear journey, a zigzag navigation between the pitfalls arriving from the banks and the uncertainties of an election year that could prove to be decisive for the extended future of the euro community.
THE YEAR OF CONTRADICTIONS
In this situation, it is difficult to make forecasts beyond the first half of 2017, "the year of contradictions" as Gregorio de Felice, chief economist of Intesa Sanpaolo defines it: "It is a contradiction - he explains - that Trump wants to accelerate the growth of the USA , already the best economy today, close to full employment. It is a contradiction that Europe, which should free itself from the austerity policy, cannot do so, because it is conditioned by the forthcoming elections”. Finally, “there is the German contradiction: Germany boasts a budget surplus which, however, it does not intend to allocate to investments that would be precious for the Eurozone”. In these contexts, continues the banker, "the Italian Stock Exchange has moderate growth margins, also because it is depressed compared to the other European markets, which are in turn weak compared to the USA".
The American locomotive looks set to pull the race, given the promises of the new president regarding investments, tax relief and other benefits for the business. However, it is not certain that the movement will take off from next week. "Starting from 10 January - suggests Alessandro Fugnoli of Kairos - we will have the quarterly results and it is difficult to think that the strong dollar has not caused some victims among American exporters". On the contrary, the champions of Made in Italy will have pleasant surprises arriving with the next balance sheets.
WATCH OUT FOR POLITICS. BUT WITHOUT DRAWING WRONG CONCLUSIONS
Let's try to go beyond the reports of the financial companies that are flooding these days and which, in a few weeks, will be completely forgotten. Predictions, as we know, are made to be denied, as 2016, the year of political surprises, wrong polls and wrong oracles from the gurus, demonstrated with a wealth of examples. But a valuable indication can be drawn from the errors. First of all, let's take note of two novelties: a) electoral appointments are increasingly unpredictable. For multiple reasons. The social inequalities amplified by the collateral effects of the monetary easing policies implemented to counter the effects of the recession of the past few years and the resulting populist movements have distorted the traditional dynamics of the vote. Demographic changes can probably also be counted among the reasons that are changing the political scenario of our country as well as of our continent. b) Markets are becoming increasingly quick to digest the expected and unintended results of political events. Stock markets took a few days to digest Brexit, a few hours for the American elections. And a very few minutes were enough to reverse the possible consequences of the Italian referendum.
Will it be the same in 2017, a year that foresees numerous electoral deadlines, from France to Germany up to the possible early Italian vote? It is highly probable, is the opinion of Intermonte advisory, so it is necessary to bear in mind that the markets have now become very quick in their ability to adapt to situations. Also because "the market is made up of products that tend to escape traditional logic: smart beta or sector ETFs, futures, options and derivative instruments that can impact movements in an extremely significant way".
RATES AND OIL, THE TWO COMPASSES FOR DECIDING
In short, let's not be surprised if new surprises flock in 2017 that the traditional wisdom of the Stock Exchanges will find it hard to understand (and exploit). Better to focus on other signals, first of all the stability of the oil agreement and the upward trend in interest rates. In 2016 the rule of "negative rates forever" went into crisis, which seemed to be the mantra of the markets for a very long time to come. Even the rebound in oil occurred well before there was talk of production cuts which only materialized at the end of the year. A multi-year contraction in dollar-denominated commodity prices that had been triggered/emphasized by the recession after the 2008 economic crisis and above all by monetary policies since 2014 has effectively ended. The impact on sector stocks energy and oil first and the banking and financial sectors has already changed the reference framework of the markets.
PIAZZA AFFARI TO THE RESCUE UNTIL JUNE: THEN, WHO KNOWS'
Many signs push us to judge the near future of the Italian market with moderate optimism.
a) We start from the depressed level, mainly affected by the banking crisis. The portfolios of international managers are empty of Italian stocks despite the undervaluation of many values based on fundamental data (the price/earnings ratio is on average 15% lower).
b) GDP growth should rise to 1%.
c) The global interest rate trend should also benefit the Italian financial sector.
d) The political situation, for now, does not worry much. The investment houses are betting on a solution, with regard to the voting system, capable of defusing the risk of a success of the M5S.
e) The contribution of corporate battles will be important (not just Mediaset) and the resumption of takeover bids, already anticipated by Parmalat.
Italy, therefore, will follow the evolution of the European markets, the clay pot of the international scene. To quote Alessandro Fugnoli “In its fragility, Europe will therefore continue to resort to soothing, painkillers and antidepressants such as the undervalued euro and Qe, to which will be added a further modest easing of fiscal policy, which will in any case remain inspired by austerity. These remedies will by no means be decisive, but they will allow us to carry on and will leave the European stock exchanges the possibility of following Wall Street upwards and even surpassing it". Indeed, Italy can hope to recover part of the lost ground compared to its partners in 2016.
GOOD BANKS, EXPORTS AND ENERGY
According to Daniel Gros, director of CEPS in Brussels, Italy will in fact be the country that will derive the greatest benefits from the rise of the dollar, as already happened at the beginning of the XNUMXs after Ronald Reagan's accession to the White House. The effect of the strong dollar, according to the German economist, is three times stronger for Italian exports, oriented towards "light" exports compared to Germany, strong in capital goods partially impervious to the exchange rate effect.
In addition to the rush of the manufacturing sectors most exposed to demand from the USA, 2017 could see the comeback of the banks. But only after having clarified the numerous unknowns that weigh on the sector: the rules on capital requirements that will be required by the ECB; the corrections to the changes requested in the reform of the Popolari, which threatens the launch of the New Bpm; the outcome of the forthcoming recapitalization of Unicredit and Veneto banks (Veneto Banca and Vicentina). But the expectation of further increases in market rates plays in favor of the sector. In 2016, the 50 cents rebound in interest rates on the bund triggered a 17/18% rebound in the banking sector in Europe and even more substantial on the Italian market.
Oil and oil equipment stocks should benefit from higher oil prices and a recovery in infrastructure investment as advocated by Donald Trump. Thanks to the boom in raw materials (not only oil, but also copper and iron) many economies of emerging countries are back to shine. The Russian price list is flying, signs of recovery are coming from Brazil. Turkey is suffering.
BTP, SHORT DEADLINES BETTER
On the bond front, it is worthwhile shortening the maturities of BTPs. This is the advice of the money managers of JCI Capital, who predict that the next few months could therefore be very difficult for the European Union, both from an economic and political point of view.
The electoral appointments scheduled both in France and in Germany and the effective investiture of the newly elected American president may in fact constitute elements of potential break with the previous balances. In addition, the process of separation between the United Kingdom and the European Union will probably be started, which promises to be long and tortuous. In this generalized context of uncertainty, the peripheral countries of the Eurozone risk experiencing greater volatility.
Among them, Spain appears relatively more protected. Italy, on the other hand, could lend itself more to potential crises, especially if the banking crisis continues. In particular, JCI Capital specialists believe that yields of 1,75%-1,8% for the ten-year and 2,80%-2,85% for the thirty-year could be interesting areas in which to reduce the weight of the securities in the portfolio. Therefore instead of such high maturities, it is more prudent, in their opinion, to hold short securities in the portfolio, with maturities up to a maximum of 5 years, modulating the portfolios on shorter durations, waiting for the possible expected new rises in yields to offer in interesting buyback opportunities in the coming months.
