The Italian stock market continued its run in the first part of 2024, after beating the European stock markets in 2023. But the third quarter opens with the uncertainty of the French elections and the future structure of the European Parliament, which may also have repercussions on Piazza Affari.
Meanwhile, political risks have already made themselves felt on government bonds, with an increase in the spread compared to German Bunds, taken as a reference for the euro area. A trend that investors in BTP Valore and other government issues must monitor carefully.
Piazza Affari beats European stock markets in the first half of the year
Piazza Affari closed the first half of the year up by 15.6% (Morningstar Italy TME index as of 26 June), doing better than the rest of the European markets (+10.1%), thanks above all to the rally in banking stocks, which weigh on 32.6% in the Morningstar Italy TME index. Among the stocks that contributed most to the performance of the benchmark are Unicredit UCG (+49.1% as of 26 June) and Intesa Sanpaolo ISP (+39.1%). Outside the banking sector, the most significant contribution came from Ferrari RACE (+28.4%)
On the bond market, the spread between the 10-year BTP and the Bund of the same maturity narrowed until the beginning of June and then widened after the surprise announcement of elections in France following the disastrous result of Emmanuel Macron’s party (Renaissance) in the European elections of 6-9 June.
Also on 6 June, the first rate cut by the European Central Bank (ECB) arrived after the tightening cycle that began in July 2022. The decision was widely awaited by the markets, who, however, immediately understood that the normalization of monetary policy could last a long time. The president of the Frankfurt institute, Christine Lagarde, in fact, has not committed to a process of reducing the reference rates, reiterating her dependence on data, in particular on inflation.
Economy up, inflation stable
In the first part of the year, the Italian economy expanded with GDP (Gross Domestic Product) increasing by 0.3% in the first quarter compared to the fourth of 2023 and by 0.7% compared to the same period last year (Istat data). Inflation performed better than the rest of the euro area. In June – according to preliminary estimates by Istat – it recorded an increase of 0.8% on an annual basis, as well as in May and April. Core inflation (excluding energy and food) also remained stable at +2%, the same level as in May (+2.1% in April). EY projections for the Italian economy, published on June 27, indicate real GDP growth of 0.8% in 2024 and 1.3% in 2025 with a reduction in the inflation rate from 5.6% in 2023 to 1.4% in 2024 and 2% in 2025.
What to expect from the markets in the third quarter?
If the macro picture seems favorable, what should investors in Italian government bonds and stocks expect for the third quarter?
The comments collected by Morningstar among economists, managers and strategists in the last week of June are oriented towards greater caution due to the uncertainty generated by the French elections and the wait for the future structures of the European Parliament. Furthermore, experts are carefully watching the moves of the European Central Bank and the dynamics of inflation and Italian public debt.
“The third quarter will probably be a waiting quarter, in which political and geopolitical issues will receive the most attention, as different outcomes could lead to choices with different impulses on future economic growth,” says Alberto Chiandetti, manager of Fidelity Funds – Italy at Fidelity International.
“During the third quarter, the governance structure of the European Union will have been outlined and, depending on the result, some issues may see a new acceleration or, instead, suffer a slowdown (for example defense and energy transition)”, he adds Chiandetti. “But the real focal point will be the approach to the elections in the United States which will determine the evolution of economic and geopolitical policy in the coming years with potential impacts on the competitiveness of European industry”.
“The evolution of Italian assets (bonds/credit and shares) was solid in the first part of 2024 and supported by a risk-on approach of the markets,” says Gian Marco Salcioli, strategist at Assiom Forex, the Italian association of operators of financial markets. “The positive outlook in terms of growth and low inflation, which has been somewhat higher than in other European countries, is called into question by the political evolution caused by Macron’s call for general elections following the European Parliament elections ”, adds Salcioli, underlining that recent political events highlight the high risk of contagion on the markets resulting from uncertainty about future developments in France.
How much will government bonds yield?
Investors’ eyes are focused above all on Italian government bonds, after the widening of spreads generated by European political uncertainty.
“Government bond yields continue to remain high, with the Italian 10-year bond above 3.9% and a spread with the German Bund above 150 basis points,” comments Maurizio Mazziero, economist and founder of Mazziero Research in a note for Morningstar on June 24.
“It is difficult to establish a dynamic for the third quarter, given the unknowns at European level on the new composition of the Parliament and the game of alliances that may arise from it,” continues Mazziero.
But investors in government bonds must also carefully monitor the dynamics of Italian debt. “Public accounts continue to be characterized by new records (2,906 billion euros in April) and the recent decision to start an excessive deficit procedure for Italy contributes to determining a tense climate among operators,” explains Mazziero. “The perception of greater risk on Italian government bonds could maintain a higher yield for a certain period of time, even in the event of further cuts by the ECB.”
Will Piazza Affari continue to run?
Luca Simoncelli, investment strategist at Invesco, is among those who see investment opportunities in Italy right now.
“We believe that the economic context in Italy favors the determination of a decidedly interesting risk premium. Growth is currently below long-term potential, but we expect an acceleration and improvement in growth expectations. The recent volatility, triggered by political uncertainty, appears to us to be confined to the French economy. In fact, both the spread of BTPs compared to Bunds and the Italian stock market are confirmed to be stabilising. The opportunity for growing companies with good fundamental valuations is increasingly evident on the Italian stock market and with the confirmation of the cycle of interest rate cuts undertaken by the ECB we expect a greater positive influence for the Italian market”, says Simoncelli.
For Chiandetti, “valuations, in Italy as in Europe, are still low compared to historical averages (9.1x PE for the FTSE Italia All Share), even among financials despite recent performances”. The Fidelity International manager underlines how the levels of cash-returns between dividends and buybacks remain important in this sector, supporting the index, as banks weigh for over 28% for a total of the financial sector that today is at 38%.
Bank stocks at the end of their tether?
As regards investment choices, Chiandetti states: “In the financial sector, the FF – Italy Fund has returned to overweighting business models that are not affected by the expected drop in reference rates (asset management and insurance companies), reducing the exposure to pure commercial banks by a few points”.
Massimo Trabattoni, head of Italian equities at Kairos, believes that “constructive sentiment” on the banking world could receive “a final positive boost from the second quarter reporting and then gradually fade away, giving way to a recovery in asset managers, thanks to the renewed preference for investments in managed savings products, and in utilities, which are particularly sensitive to the relative discount rate”.
Trabattoni adds that “as long as visibility on the European political context remains low, we can expect an outperformance of exporting companies, less exposed to any fluctuations in domestic consumption”.
Small cap yes, but selectively
In recent years, small and mid-cap companies (SMEs) have not kept pace with large caps on Piazza Affari. In the last twelve months alone, the FTSE Star has underperformed the main index (FTSE Mib) by around 20 percentage points. Investors, however, see investment opportunities in the segment.
“Among the small-mid cap companies, there are interesting stories with exposure to global markets, with structural growth at interesting multiples, such as Brembo BRE, Diasorin DIA, De’ Longhi DLG or Piovan PVN, or there are companies at a strong discount compared to their medium-term potential, such as Ariston ARIS”, says Chiandetti.
For Trabattoni, “the moment of uncertainty resulting from the early elections in France” should be seized as “an opportunity to invest with a highly selective approach in Italian SMEs”.
