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Italy seen attractive for 2018 despite election worries

While Italy faces election and non-performing loan (NPL) challenges, Aviva Investors believe that its market is looking attractive for investors in 2018 but fund selectors warn the country should not be a core part of a global portfolio.


Jassmyn Goh

Aviva Investors’ 2018 outlook said the firm was going overweight in Europe with more allocations towards Italian equities as the country had been a beneficiary of the economic upswing in the eurozone.

Aviva Investors multi-asset senior strategist, Ahmed Behdenna, said Italy was growing at twice its potential growth and that European banks, including Italian institutions, were very attractive.

“Non-performing loans have been a problem for Italian banks in the past and this remains the case, but steps have been taken at eurozone level to address the issue,” he said.

“Non-performing loans have not gone away, but the situation is improving.”

Rate concerns

Behdenna said the expected European Central Bank (ECB) policy changes was another positive for Italian banks, though a Generali Investments report noted that the net issuance of Italy would be positive for the first time since 2014.

“The ECB is likely to end its tapering programme in September, at which point the focus of the market will turn to rate hikes,” Behdenna said.

“But there are still challenges on the horizon. Italian unemployment remains high and there is a need for structural reforms. Even though the date of the election is looking likely early March, markets are likely to be volatile in the run up to the vote.”

Election risk

On the election, Legal and General Investment Management senior European Economist, Hetal Mehta said it was likely to be the most significant risk event but that the risk of an anti-euro Five Star Movement (M5S) government was limited.

Italian savings banks BCC Risparmio & Previdenza head of fund selection, David Karni, said while Italy should not be a core part of a global portfolio, from a valuation point of view Italy was cheaper than other areas such as emerging markets.

“From the valuation our main index is overweight in financials and all the problems related to the banks and the NPL, the regulations, all these have weighted our index to the bottom of the comparable market… 2017 was a good year and I think the main contributor was the PIR [Individual Savings Plans] story that maybe has pushed the market to perform this year,” he said.

“From the macro point of view Italy is still at the beginning of what I hope is a 10-year growth in GDP and in inflation, but we’re lagging the global cycle.”

Volatility to rise

Karni noted that there could be volatility in the lead up to the general election that was likely in March.

“We will have some kind of volatility and if you think for the first quarter of the year will be idiosyncratic for Italy and the second half maybe will have some troubles towards the normalisation of the ECB,” he said.

“From the fixed income side, you’ll have some replacement of yield, movement to higher levels for fixed income but from the equity side it can be an idea in the portfolio.

“If we have a spike in the yield of BTPs [multi-year treasury bonds] this can damage the banks, their balance sheets are full of BTPs. The banks financially are the biggest sector in our main index and can cause volatility in the equity side.”

Karni said Italy would not be the engine to push global recovery but from a strategic point of view the country could be positive.

“We had some cloud, but still can be positive,” he said.

IPO interest

Karni said he expected to see more IPOs in the index as small caps could be a great contributor to the market’s overall performance.

“This can be interesting to see the main index against the middle small cap index,” he said.

“In the last year the middle small cap continuously outperformed the main index due to the fact that the small and mid-cap is less financial orientated and is more consumer and industrial orientated, and this can be a second way to play Italy in the portfolio.”