Italy is in a favorable crossroads of positive elements which should be exploited. However, there is no shortage of external risks: geopolitical tensions and the increase in inequality are the most insidious ones, while inflation and monetary policy have already been partially absorbed. Market fluctuations are therefore to be taken into account in the near future. How to articulate portfolios in the coming months? Which sectors should you invest in? Here are the considerations and assessments of Luca Tobagi, Investment Strategist of Invesco, one of the most important asset management groups globally.
Doctor Tobagi, how do you assess the current economic and financial situation in Italy?
“There are many positive and important elements. Today we find ourselves in the best situation in recent decades, with a favorable alignment of all conditions: we have structural reforms, resources, Pnrr. According to the latter, only with the justice reform could there be an increase in productivity of 0,5% per year, for that of the Public Administration a growth of 1,5%. Even considering achieving only 10-20% of these objectives, we could have a contribution to growth of at least 0,2-0,3%, very significant for a country where growth has been struggling to rise above zero for many years.
If anything, in Italy, more than in other countries, attention must be paid to inequalities, to the correct distribution of resources in the production channels. If not well managed, these elements could get out of control and also weigh on the economy”.
The financial wealth of Italians, according to Bank of Italy data, amounts to over 4.400 billion euros, of which the amount held in liquidity on current accounts has reached almost 1800 billion. A very substantial amount and on exceptional levels. How do you evaluate this attitude of the Italians and how could this saving be channeled towards productive activity?
“This phenomenon has also occurred in other European countries and is the result of the combination of an accommodative monetary policy with general uncertainty and almost non-existent inflation in recent years.
The current rise in inflation modifies the scenario and – albeit slowly – we could see a change in behaviour”.
How could household financial investment be encouraged? Could tools such as PIR still be suitable?
Adopting valid tools such as Pir (Individual Savings Plans) is extremely useful, as are tax incentives for long-term investments, also towards the Italian economy which deserves to make progress. Savers need to be informed about which opportunities are best and most suitable.
How do you see the trend of inflation in Italy in the coming months?
“Our vision is that in 2022 we could see inflation peak, which could then gradually decrease over the next 2-3 years towards levels more in line with central bank objectives: if it deviates from it and settles above 2%, probably it could be more 2,5% than 4%. It will depend on the prices of raw materials and possible wage increases".
Big Tech and Big Pharma appear to be the stock sectors most affected these days by stock market selling: is this a healthy correction that will allow you to return to the market at cheaper prices or the warning of the bursting of two bubbles?
“We don't see speculative bubbles in the market. In the technological field, there are companies on the Nasdaq that have risen a lot by grinding profits, turnover and cash flows: for these, a correction of 10-20% will be physiological. Then there are other good, albeit slower growing tech companies (representing 20-25% of the Nasdaq) that could be invested in. But the fear is that these will not be able to withstand the correction of the rest of the market. Once the wave of sales has subsided, it will be possible to bring back the companies that have solid fundamentals”.
And for the pharmaceutical sector?
“The pandemic was a favorable accident which in many cases led to significant additional turnover and profits. With the hoped-for decrease of the pandemic, this further tailwind will probably also decrease, but I would be careful not to stray too far: the pharmaceutical sector has appreciable characteristics of solidity and predictability, so even if there were a retracement, it must be considered that the fundamentals are usually strong and care must be taken not to throw the baby out with the bathwater”.
Identify currently subdued sectors that could instead recover in the coming months?
“Equity dynamics are linked to earnings dynamics and valuation dynamics. We come from years where both have grown and even in 2021 we saw earnings estimates grow more than valuations for the first time in many years. We are entering a phase of the business cycle in which these two elements that support equity markets are also set to fade: some inflation, monetary policy that could become a little tighter and bond yields that have already started to move slightly upwards: these are all elements that are not usually favorable to the equity markets.
Market swings will be the norm for the coming months. Portfolios with a defensive composition will be rewarded, with a portion of quality stocks in sectors such as pharmaceuticals, consumer stable, food, personal care, while always paying attention to valuations.
Of the risks currently hanging over the markets (pandemic, monetary policy, inflation, economic growth, war winds), which do you think are heaviest?
“I believe that the pandemic, inflation, more restrictive monetary policy have already been at least partially priced in by the markets. The one that usually has the biggest and most negative impact is the sudden shock. For example, tensions in Russia, Ukraine or Kazakhstan should be monitored.
In the past these types of dramatic events have been absorbed by the market in a short time. But the problem is if the underlying of the economy is affected and I'm not just thinking about the repercussions on prices: I'm also worried about quantities and the risk of rationing. It's called tail risk, it's remote, but markets may not be reflecting that yet and investors should take that into account."
