Luca Riboldi, CIO Banor SIM, quoted in an article of Il Sole 24 Ore Plus.

By Andrea Gennai

The dry statistics are unambiguous: since the start of the year the FTSE MIB index of blue chip stocks in Milan has gained over 17% and is ahead of the other European stock markets. Frankfurt, for example, has only risen by 13%. But unless we analyse the entire period of the financial crisis, these figures could be deceptive. Milan is, in fact, still about 50% down on its peak levels of 2007, while Frankfurt saw a new peak in April and today is 13% from its highest levels.

“Since the start of the year the FTSE MIB has performed best in Europe because Italy needs to regain lost ground, including in stock market terms, with respect to the past”, comments Marcello Rubiu, partner in the Norisk consultancy. “It’s one of the few countries to have improved its economic prospects. Stock exchange multiples were lower than others at the start of the year and are now back in line with the average”.

It is interesting to note, however, that in these recent difficult months the Italian indices have followed Europe more closely, while previously we had seen a fairly marked out-performance. “In the last three months in the FTSE MIB Telecom has held its ground, for speculative reasons, as have utilities”, continues Rubiu.

Utilities, especially those subject to regulation, are also affected by the zero rate conditions and so we’re seeing a sort of side effect of quantitative easing (QE, the monetary policy decided by the European Central Bank (ECB)). In a situation where rates are at their minimum levels, buyers are focusing on high dividend shares (Snam, Terna etc), which are usually more defensive, and which are again competitive as an effect of the practically non-existent return on bonds. They’re not cheap, but in the absence of any sign of a rise in interest rates the market is continuing to bet on them.

The strength of defensive stocks in this period is a signal that the recovery in shares is still half-hearted and is a constant of Europe’s stock markets. “On the Stoxx 600, in other words the principal European stocks”, explains Luca Riboldi, Chief Investment Officer at Banor SIM, “defensive stocks are at their strongest levels in the last 20 years with respect to cyclical ones. Food and drink, telecommunications and other sectors are notably ahead of stocks that are more sensitive to economic trends, such as construction, media and banking. That’s the tangible sign that expectations for global growth are weak. What QE has still not produced is a global economic recovery. It worked in the States because it started earlier there, while in the European version its effects have still to be played out in full”.

The decisive variable to understand the how the recovery will unfold is the rise in rates and the resumption of inflation. This will definitely lead to a recovery in earnings for cyclical stocks, but right now the economic growth figures aren’t encouraging and rates are still very low. In the last two years, two-thirds of global growth has come from the emerging economies, and if sentiment on those countries doesn’t change, global growth will not firm up. “Since the start of the year Italy had done well”, concludes Riboldi, “because it has reduced the gap with other European stocks; evaluations were more attractive. Now, however, we need to see a new impetus to continue out-performing the others”.

Original article in Italian language, available here: Il Sole 24 Ore Plus, November 7, 2015.


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