Italian market could post best performance in eurozone, says SYZ AM’s Quirighetti
We believe there is a strong case for European equities this year as they will benefit from positive triggers and support, says Fabrizio Quirighetti, head of macro-economic research and Chief Economist at SYZ Asset Management and manager of the OYSTER European Fixed Income Fund and OYSTER USD Bonds funds.
First, there is the economic recovery in the eurozone. Even if feeble, we believe the trend is to the upside. Second, confidence and risk appetite from both domestic and external investors has come back: it started in the bond markets with the “whatever it takes” of summer 2012 and then started impacting positively on peripheral equities at the end of last year. Last but not least, the ECB may become more accommodative going forward as deflation risks increase and indirectly help to weaken the euro somewhat as a result.
In this scenario in which you have the best of two worlds for equities (improving economic outlook with more liquidity), European stock markets look set to outperform the other major global indices in 2014. Note that it’s the reverse of the situations we saw in summer 2008 and beginning of 2011, when the ECB hiked rates in spite of fading economic momentum. In this environment, Germany should, logically, manage to perform well again in 2014 as monetary policy remains too accommodative for its economy and it benefits from a more global recovery.
However, we think attention should focus on the Italian stockmarket as its catch-up potential remains impressive, with its index trading about 50% lower than its previous 2007 record. With a further fall in Italian borrowing rates (currently the 10Y Italian government bond yields about 3.8% vs an average of 4.3% in 2013 and 5.5% in 2012) thanks to an improvement in growth outlook, political stabilisation and an ECB that is opening the monetary tap wider, the Italian index could well be the star performer this year. Whilst the index’s composition has seen it being penalized in recent years (banks, cyclicals and utilities have large weightings), it would be playing to its advantage in the scenario outlined above.
Investors will now be certainly looking more closely at value stocks, recovery stories or, at least, companies that are closely linked to the improving economic backdrop. Savvy investors until recently had been focusing on high growth, high margins, high dividends and a clean balance sheet. As a result, valuation of these stocks has soared and potential disappointment increased. They should now turn their attention to Italy.