Some good comments here via Societe Generale on a rather contrarian call. They think you should be optimistic about Italian stocks for the following 3 reasons:
“Eurozone action eased Italian yields
On 6 September, the ECB unveiled the Outright Monetary Transactions (OMT), its new bond-buying scheme that will allow it to purchase unlimited amounts of short-term sovereign bonds upon conditionality. Last week Germany’s Constitutional Court ruled in favour of the ESM, the euro area rescue fund. Following these decisions, peripheral country yields dropped significantly, with Italian and Spanish 2Y and 10Y sovereign yields falling by more than 50% and 20% respectively from end-July. This commitment from the ECB to act and reduce eurozone country borrowing costs comes on top of structural measures adopted by Mr. Monti this year. Indeed, a series of major steps have been made by the prime minister to turn around the Italian economy.
Italy is now running a primary balance surplus again
Since his appointment, Mr. Monti introduced a series of reforms, such as tax hikes and pension reforms, to improve Italy’s fiscal stance. The government also started a spending review to identify potential spending cuts while parliament approved a balanced budget rule in the constitution. During H2 11, the government passed three austerity packages which bring the total fiscal adjustment to around 5% of GDP for 2012-2014. The resulting primary surplus could be as high as 5% in 2013 and should help put the debt ratio on a declining trend after 2013. But fiscal consolidation has a cost, and this cost is called recession. Therefore, the key issue for Italy following the implementation of structural reforms is to find a way to increase future GDP growth.
Italy is pushing for ambitious structural reforms
Over the last decade, Italy’s competitiveness deteriorated as a result of lower productivity and higher wages. In the past, Italy tended to devalue its currency, but today it has no other choice than to implement structural reforms, which is what Mr. Monti is pushing for. In June, the parliament approved reforms to improve labour market flexibility. Reforms have also been implemented to restore competitiveness in energy, transport and services, to name but a few areas. Although some measures have been watered down, further reforms are still needed to boost growth, notably by addressing the rigidity and low participation of the labour market and the shadow economy. The outcome of the Italian elections will therefore be crucial for the continuity of reforms.”
Not sure I agree with the last point since structural reforms will be very slow to take place and what Italy really needs is more fiscal policy, but it’s certainly a contrarian outlook to be bullish about Italy right now. The worry regarding points 1 & 2 is that the equity market has already priced in the impact of lower rates during the course of the recent 2 month 30% rally.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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