If we have a distinctive quality it is that of putting a spanner in the works by ourselves. In an overall positive moment on the markets, despite the trade war and Brexit, Italy has decided to differentiate itself, for the worse.
After a brilliant 2017, from 16 April 2018 onwards the Italian bond market suffered a sharp downsizing (-14%), which brought the medium-term performance back in line with the international markets.
The rise in yields is not the result of a difficult market context, but it is all our own, because in the same period the spread (differential between ten-year government bonds with the same German bond) of the peripheral countries of the Eurozone it has practically not moved, and where inflation runs higher (USA and United Kingdom), the spread has risen by less than half. Therefore, the rise in yield seems to be the result of the Government's loss of credibility. The rise in nominal yields has restored some value to the government bond market, but we must pay attention to the deterioration of the credit profile, which discounts a bad ratio between public debt and a forecast growth rate that is not record-breaking.
On the equity front, the market momentum is not much different. After a 2017 and an explosive start to 2018, the stock market took a break for reflection, collapsing by 17% between 30 April and 3 September 2018, losing in less than four months almost all the gap previously accumulated with respect to the euro area . As often happens, when there is tide over Italy, the bulk of the decline affects bank stocks, which are weighed down by the increase in the cost of debt, and this was the case this time too.
Conversely, mid-caps held up well. The results on earnings per share are positive and have contributed to the rapprochement with analysts' expectations, which have remained intact even after the stock market crash. The various angles from which market valuations can be interpreted offer different interpretations. Overall the market seems to us to fair value, neither too expensive, nor too discounted.
Meanwhile, Italy's economy has lost its lustre, just like the rest of the eurozone. In theory, according to the forecasts of the European Commission, in the two-year period 2018-19 GDP should fall and be supported by domestic demand. Right now, on the domestic front, the growth rate of employment fails to give a greater boost to consumption; and on the export front, the support from the depreciation of the euro has ended and the effects of the trade war could begin to weigh.
That Italy is a country with weak growth and high public debt is nothing new, and investors are more than aware of it. Equity returns and valuations appear to us in line with fundamentals, it's all a matter of perception from here on out. The Government has a huge responsibility to take.
