Italy: energy crisis, inflation, and the macro environment

These are uncertain times for the Italian market, mainly due to rising energy prices, European Central Bank policies to tackle inflation, the change in government, and global geopolitical risks.

The main international indices are showing no signs of recovery, with the FTSE MIB at around -20% year to date, the Euro STOXX at -18%, the Chinese indices at -22% (CSI) and -27% (Hang Seng), and the American Dow Jones, S&P 500, and Nasdaq at -16%, -22%, and -31% respectively. In the last month, the best performers have been the travel sector, where the post-COVID tourism recovery trend continues apace and corporate travel also shows signs of improvement, the banking sector, where interest margins benefit from rising interest rates, and the media segment. In contrast, the sectors that have suffered badly include real estate, probably due also to the hike in mortgage rates, and the utilities sector, which has been hit by the energy crisis and fears over rising bills.

Companies’ third quarter results have been highly anticipated in recent weeks. It will be interesting to see if, as expected, consumer spending has fallen as a result of energy and food cost hikes, which will be reflected in companies’ results. While this would point to the onset of a recession, it would also finally allow analysts to start revising their estimates for the end of 2022, and for 2023 especially, bringing them in line with the new and now inevitable macroeconomic scenario. Currently, the market consensus on the profit forecasts of listed companies in Italy for 2023 compared to 2022 sees only a -2.5% aggregate drop, with a +10% rebound in 2024. This may be an overly optimistic outlook.

Looking at the government scenario, the new Prime Minister Giorgia Meloni has pledged to continue along the fiscal path mapped out by Mario Draghi. The first signs of this came with the announcement that there will be no budget changes, which helped calm the markets.

The markets’ reaction to populist expansionary manoeuvres has been amply demonstrated in the UK in recent weeks. There, the scenario involved a further widening of the deficit against a backdrop of inflation and the economic brake of rising rates. For Italy, already struggling to manage its growing public debt, a similar manoeuvre could damage the confidence of foreign investors, leading to stress on the BTP and an outflow of foreign capital from the Italian market.

Another crucial factor for Italy, which is heavily reliant on Russian gas and therefore acutely affected by the energy crisis, is a Europe-wide agreement to finance an EU fiscal intervention in support of consumers and businesses. Unlike Germany, which has the resources to mount a €200 billion plan to support households and businesses, Italy cannot afford to take on further debt to subsidise bills.

At a time like this, it is more important than ever to invest selectively on a medium to long-term time horizon. There are many Italian companies that have sound fundamentals but are undervalued. These could be good investment opportunities, particularly in sectors that generally do not experience major performance fluctuations during a recession.

Commentary by Massimo Trabattoni, Head of Italian Equity.