Draghi plans recovery and resilience

The Italian market was particularly volatile in April, with a start that was characterised by the continuation of the previous quarter’s favourable trend, getting close to the resistance level of 25,000 points, then falling as much as 4% towards the middle of the month and ending with a sharp recovery at around 24,500 points. At the sector level, positive contributors included Basic Resources, Discretionary Consumption, Real Estate, Technology, Industrials and Healthcare; while more cyclical sectors such as the Automotive Industry, Energy, Financials and Insurance underperformed.

The market’s attention is certainly focused on the trend of Covid-19 infections, especially with regard to new variants such as the Indian strain, and the roll-out of vaccines, which finally seems to have picked up pace even in Europe. In recent weeks, Italy has been averaging 380,000 vaccinations per day and has already inoculated more than 12.5 million people with the first dose.

The other major point of interest is the opening of the reporting season: most companies beat analysts’ estimates, partly due to a basis of comparison that refers to a month impacted by the severe lockdown in March 2020. Beating estimates, however, may not be enough for the market, given the upward trend in stocks since the beginning of the year and higher buy-side expectations.

At the macroeconomic level, investors remain focused on the announcements regarding the National Recovery and Resilience Plan (NRRP). In the last few days, the government has published the guidelines it will use to invest the money made available by the Next Generation EU programme and the budget deficit planned for the coming years. In particular, 6 macro areas are identified where most of the funds will be channelled:

• digitisation, innovation, competitiveness and culture €49.2 billion;
• green revolution and ecological transition €68.6 billion;
• infrastructure for sustainable mobility €31.4 billion;
• education and research €31.9 billion;
• inclusion and cohesiveness €22.4 billion;
• health €18.5 billion.

Over the years, Italy has accumulated both a significant technological gap and a gap in ecological transition and research compared to France and Germany. This is why the markets are looking positively at this round of investment in the digitalisation of the public administration and the Italian economy and at proposed structural reforms. In fact, the Draghi government has formalised, also within the NRRP, the desire to continue with justice and public administration reform, simplification measures for the granting of permits and authorisations, and competition laws.

Looking ahead Massimo Trabattoni remains a constructive outlook on the Italian market in the medium term. Although the 10-year Italian BTP-Bund spread has already reached a new equilibrium of around 100 basis points, equity valuations remain at a steep discount to European comparables. With NRRP investments on the way, many listed companies have much to benefit from this important new demand. In terms of stock picking, therefore, the advice is to stick to those companies that will act as vectors for channelling public investment towards the Plan’s objectives.

A final theme in the Italian market is certainly that of consolidation in the banking sector, which has seen another small bank being acquired by a larger competitor. There are still many possible scenarios that could change the balance of the Italian financial landscape with merger and/or acquisition operations involving two or more operators. Market sentiment is that something may happen soon, but all scenarios remain plausible.

Comment by Massimo Trabattoni, Head of Italian Equity.