Marco Negri of Legg Mason outlines changes in Italian market

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Marco Negri, country head Italy at Legg Mason Global Asset Management, sees a possible and more distinctive “great rotation” in Italian investors’ portfolios through 2014.

What is your outlook for 2014?

It’s difficult to formulate today a forecast for 2014, but we believe that most of the trends which have been prevailing for a large part of last year, especially the second part of 2013, will be current at least in the early stage of this year. The beginning of “tapering” by the Fed, as well as the monetary policy decisions implemented by other central banks and their impact on currencies, global geopolitical events, doubts on Europe recovery and last but not least Japan and emerging markets, will remain under close observation. The difference from last year is that investors should be less surprised by the volatility that all these factors could bring on the financial markets.

How do you consider 2013 and how has the Italian investor demand been changing considering the recent market trends?

If we consider 2013, it has been a very positive year for several asset classes. First of all US and European equities, but also high-yield bonds, among others, showed very interesting performances. However, we have to consider that Italian investors typically hold a big stake of their portfolio in bonds, and in order to diversify from Italian Treasuries, especially during the last years, they significantly increased the exposure to global sovereign bonds. For this specific asset class, 2013 was a very difficult year, which generated a volatility investors were not used to. These factors brought investors to gradually increase in their portfolios the weight of stocks and high yield bonds, whom are usually considered more risky.

So can we expect in 2014 a “great rotation” from fixed income to equity to be made by Italian investors?

In part this event is already taking place, thanks to the increased focus on diversification by Italian investors during the portfolios process, however the fixed income component still remains dominant. I think the real issue is the ability of the Italian investor to withstand volatility on fixed income, as this asset class has always been perceived as a kind of safe haven. 2013 was an important test from this point of view and from here on adopting the correct approach towards fixed income will allow investors to get a better understanding of the features in terms of risk / return profile that this asset class can offer.

Talking about fixed income, what is you outlook on this asset class for 2014?

As said, the 2013 issues are still relevant today, and we expect volatility in government bonds as well as in currencies which could be generated by the “tapering” and by the monetary policy decisions implemented by the other central banks, and that’s why we continue to prefer a very active management style on the global government side. Emerging markets have to be approached in a very selective way, both in terms of country choice and currency choice, but we believe these could represent an interesting investing opportunity not only with a medium, long-term horizon, but also in a tactical way, as we believe that the volatility which has harmed EMs is likely to come from a liquidity problem rather than from a solvency one. We also believe that the low and moderate inflation trend is expected to continue and this could favour high yield corporate bonds even in 2014. We should not forget, when talking about the fixed income market, that in a volatile market context, the “yield” component plays an important role and therefore we are inclined to favour all the fixed income strategies which could generate higher levels of “yield”.

 

Milan

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