Corriere Economia

The opinion. According to one manager the situation is still idyllic for the US stock exchange. But prices are high and something could go wrong.

“Milan’s Piazza Affari can beat Wall Street by 15 points”

Riboldi (Banor): Reforms, weak euro, oil prices at rock bottom. Three possibly unrepeatable conditions for the stock exchange

by Pieremilio Gadda

With 2014 and its disappointing minus signs behind us, January saw Piazza Affari [Milan’s stock exchange] engaging turbo drive with a rise of 9%. Will 2015 be the year of redemption? “The Italian stock exchange can beat Wall Street’s performance by 15 or 20 percentage points. On 3 conditions”, explains Luca Riboldi, Chief Investment Officer at BANOR SIM. “They are: a weak euro until December, below 1.20 against the dollar. Crude oil at less than 60 dollars a barrel throughout the year. And no halt in the slow but steady pace of the reforms”.

Some stocks have already performed really well, especially where profits are in dollars. In just one month names like Moncler, Salvatore Ferragamo and Luxottica have gained 15% to 30%. Stock market multiples have already anticipated the dollar’s effect on earnings. In January Italy’s composite SME index, which expresses the confidence of purchasing managers in the manufacturing and service sectors, rose to 51.2, compared with 49.4 in December: above the 50-point threshold that separates contraction from expansion in the cycle.

The latest estimates for GDP growth in 2015 are 0.4%, from the Bank of Italy, and 0.6% from the European Commission. “The level could be even higher: 0.7% or 0.8%. For the first time in years, we’re more optimistic than the consensus”, Riboldi points out, in the conviction that the best opportunities are to be found in 4 specific sectors: banking, media, tourism and real estate.

The draft document sent by the European Central Bank at the start of the year, asking banks to further raise their capital ratios to the minimum requirements set ad hoc for each, caused some concern. Returns on government bonds flat-lining at minimum levels could slim down earnings from trading. “But if the economy manages to turn around, as we believe it will, then banks’ bad debts would start to diminish, and that would pave the way for more lending”, observes Riboldi.

In his view, the media sector is worth betting on too: advertising has seen a 60% collapse in revenues since 2007-08. “Part of that has switched to digital channels”, as Riboldi acknowledges. “But the sector could regain at least one third of the ground lost. It’s worth noting that in Spain growth already resumed last year, with a rise of 20%; Italy is lagging behind but has broad margins for improvement. And then there’s tourism: the ‘euro-effect’ should encourage more visitors from America, Asia and Switzerland”. This year we should also see a rise in real estate sales, says BANOR’s CIO, “with property prices possibly edging up again in 2016”.

If we agree that Milan can overtake Wall Street by 15–20%, as Riboldi suggests, we need to look at the terms of comparison: how will the American stock market perform? In the BANOR CIO’s view, the situation in the United States is idyllic right now “but all that’s needed is for one thing to go wrong, for example a downwards revision of earnings growth forecasts, to trigger an adjustment.

American stocks are also having to deal with the probability of monetary policy tightening up during 2015.

Original article in Italian language, available here: Corriere Economia, February 9, 2015.

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