Markets had an immediate euphoric response to news of the mixed measure involving CDP (Italy’s publicly owned savings and loan company), foundations and banks on which the government is working to prop up the banking industry. However, we should be wary of labeling the rally of the past few days a definitive turnaround.
Indeed, the government’s initiative reflects awareness of a serious problem: although banks are sound going concerns, the market continues to focus on impaired assets and their valuation in the event of a hasty sale. The bids seen up till now are for about 20% of their initial value: there are very few buyers on the market and they have been able to buy assets at rock bottom prices, with extremely high potential returns. Had it not stopped, the whirlwind of negativity surrounding non-performing loans would have made another round of capital increases necessary. As if this were not enough, we will have to live with interest rates at a level that is destined to inexorably compress interest margins for a few more years. And this comes on top of the weak recovery.
Growth in Italian GDP has been revised downwards to 1.2% for 2016. If growth speeds up to the previously estimated rate of 1.5%, there would be room for a recovery on the Milan stock exchange. However, GDP growth of below 1% would pave the way for additional dips, fueled by newfound concerns about demand and credit quality.
In the meantime, the media is in the spotlight again, first with the agreement between l’Espresso Group and La Stampa and then with Vivendi’s Mediaset deal. Lastly, Cairo’s offer of exchange for RcsMediagroup shares is a classic example of a segment that goes dormant for years, until an unexpected spark abruptly shakes it from its slumber. The RCS scenario presents a dichotomy: if the deal goes through, it would be an excellent medium-term investment story because the market recognizes Cairo’s ability to make the most of possible synergies on the field. However, if it falls through, the new capital increase issue would resurface… As for Mediaset, with Vivendi and on the European horizon, Premium stands to enjoy a higher valuation than it would have if it weren’t on Fininvest’s radar. At any rate, the Berlusconi family’s company would be the most affected by the Rai’s reform on advertising: if the advertising space on public service networks is reduced, Mediaset and Cairo will be the first to benefit.
At the same time, the first few months of the year saw a re-emergence of interest in securities with wide visibility and less volatile forecast earnings: regulated businesses, municipal public service companies and utilities will continue to fare well, despite the uncertain outcome of the upcoming elections.
By Massimo Trabattoni, Kairos Manager of Italian Equities, for AdvisorPrivate’s Italian Times column.