Milano Finanza

Expectations – Market operators are asking the premier to keep to his commitments, starting with rebalancing the public finances. Because without concrete action “Scrapper effect” will soon evaporate.


by Roberta Castellano and Paola Valentini

One year on from the birth of the government set up by Matteo Renzi [known as “The Scrapper”, in reference to his call to scrap Italy’s political establishment], we are now in a position to review the reforms implemented and those still to be made. Top of the list, as the development most keenly awaited by major fund managers and market players, continues to be a reduction in the debt and in public spending. Then come the reform of the civil justice system and measures to combat tax evasion and cut taxes.

These, according to a survey of Italian and foreign analysts and managers conducted by MF–Milano Finanza, are the priorities for the market. The message is clear. Italy needs to change if it is to be more appealing to those international investors who are looking at the country with great interest but who want clearer and more reliable rules.

Because in addition to speculative investors adopting tactical portfolio positions, capital for the country’s real economy is needed too. And for this to materialise several crucial steps are still needed. Gabriele Montalbetti of Consultinvest SGR sums them up as follows. “What’s needed is a plan to cut public spending and debt, a reform of civil justice and more liberalisation.

These are three points of fundamental importance to increase the country’s competitiveness and take it to an acceptable international standard. We don’t need anything extraordinary, we need only consider the example of some European countries to avoid the market concentrations and near monopolies that make some sectors immune from competition”.

As Montalbetti adds, “the reform of the justice system is vital to any country if it is to function correctly and without this it will be difficult to attract inward investment. And lastly, a cut in public spending to bring it down to the levels of other countries is a necessary condition to change direction with respect to the past. Although every government or politician always speaks about this as a priority, until now very little has been done and the areas of intervention are both numerous and well known to everyone concerned”.

The market situation is positive right now because the combined effect of the low oil price, the weak euro and the quantitative easing (QE) applied by the European Central Bank (ECB) can help GDP. And we’re already starting to see some signals.

The Italian National Statistics Institute (ISTAT) figures published on Friday 13 February mark the end of the recession for Italy, which should now enter recovery. In detail, ISTAT’s calculations suggest zero growth for Italy in the fourth quarter of the year with respect to the previous three months. The figure is better than the expected 0.1% contraction. The timid signs of improvement seen in the second half of 2014 can mainly be explained by the steep depreciation of the euro.

The positive contribution made by exports alone, however, observes Vincenzo Longo, strategist with IG, “cannot lead to the medium to long-term sustainable growth that the country has been lacking for years. Against the background of the slowdown in global growth we need to leverage domestic demand if we want something more than insipid growth.

Unfortunately, as long as the unemployment rate stays at these historically high levels we can hardly expect a recovery in domestic consumption”. In the next few quarters, Longo expects a fractional improvement in GDP “while to see growth of more than 1% we’ll need to wait for 2016, when QE will begin to produce its effects. Alongside the monetary policy manoeuvre, we also need reforms that are able to stimulate households’ and businesses’ demand for credit”, underscores the IG strategist.

But measures that facilitate business activity are also necessary. “The market situation, especially throughout the euro area, is showing clearly favourable conditions that it would be a pity not to exploit. The government’s initiatives should focus on facilitating and simplifying business activity as a whole, including through rules to facilitate the flow of savings to businesses not just through bank credit but by creating the conditions for easier direct access to market capital”, notes Massimo Gionso, managing director of CFO SIM.

As Gianfranco Negri-Clementi, founding partner of Negri-Clementi Studio Legale Associato, adds, “The reforms must all be addressed to reducing tax and social security pressure and eliminating red tape, so as to facilitate freedom of initiative within the framework of the state guidelines on legality and social provisions”.

Paolo Guida, Vice President of the Italian Association of Financial Analysts and Advisers (AIAF) agrees. “Many reforms remain to be completed and indeed launched. Of those already indicated, it’s worth noting the need to find a practicable solution to reduce not just government spending but also public debt by increasing the efficiency of the public administration, reducing the number of municipally owned companies and selling off non-essential public assets. One of the factors contributing to the low appeal of Italy for foreign, but also Italian, investors is the long timescale required for civil justice and the heavy burden of red tape on businesses. Effective reforms on both fronts could increase our economy’s potential for growth”.

Nicola Esposito, chief investment officer at Tendercapital, sums up market opinion. “The important thing for Italy is to liberalise and privatise much of the activity of the state to reduce inefficiencies and the enormous public debt, by cutting red tape”. The market is, in effect, demanding more market.

But, after implementing a number of reforms over these twelve months, Renzi has made a lot of promises that the market now wants to see him keep. “There are many – maybe too many – things on the agenda that are raising expectations and, in the short-term, nurturing confidence in the work of the government. But if we don’t see concrete actions and the reforms of the Provinces, the Senate and the electoral law don’t materialise by this summer, then the “Scrapper effect” will evaporate. And so will the favourable conditions created by elections, the European Presidency, EXPO Milan… And that will place the young premier in the same category as the old professional politicians who think of nothing but power and their place in government”. That’s the warning voiced by Gabriele Roghi, investment adviser at Invest Banca.

If serious geopolitical problems, instability of the euro or a global economic slowdown were to occur, “then there could be a very strong disillusionment effect that could seriously undermine the capital of confidence that the premier has managed to build up”, concludes Roghi.

What other measures would you like Renzi to adopt between now and 2018?
Introduce a plan to cut public spending and debt 60%
Reform civil justice 60%
Use the proceeds from fighting tax evasion to cut taxes 33%
Introduce measures to cut red tape 26%
Introduce tax cuts for enterprises 26%
Introduce harsher penalties for corruption 22%
Approve long-term savings programmes with tax concessions 20%
Implement further liberalisation measures 18%
Implement further privatisation measures 15%
Lessen the impact of the Tobin Tax 11%
Reduce the stamp duty on financial investments 11%
Cut the cost of politics 11%

SURVEY PARTICIPANTS: Advam Partners, AIAF, Alba Leasing, Ambrosetti Asset Management SGR, Anthilia Capital Partners, Azimut Capital, Banor, Giuseppe Bernoni (Bernoni Grant Thornton), BNP Paribas, Consultinvest, Copernico SIM, Luca Giacopuzzi (Studio legale Giacopuzzi), CFO SIM, Gianfranco NegriClementi (partner studio NegriClementi), IG, FXCM, Ersel, Fia Asset Management, Invest Banca, M&G investments, Moneyfarm, Petercam, Tendercapital, Schroders Private Banking, Sidief, Rothschild & Cie Gestion, Union Bancaire Privée.

Original article in Italian language, available here: Milano Finanza, February 14, 2015.


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