Italian equities, a call on the European economy at attractive multiples

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By Sandro Occhilupo, Co-advisor, Oyster Italian Opportunities fund

A constellation of positive factors not seen for years is taking place in support of an Italian renaissance.

With a lower crude oil, a very accommodative ECB, a weaker EUR and a supportive fiscal policy, the Italian macro picture is clearly gaining momentum. The official GDP growth forecast has been revised upwards for the first time in years and the manufacturing indicators keep improving together with the credit environment. In this context the consumer and business confidence indices have improved significantly and have reached their highest level since 2002 and 2007 respectively.

Consumers’ purchasing power and investment capex by companies are improving and loan growth is finally resuming. The Jobs Act approved in December is clearly also a game changer. Although it is a long process, the reform is expected to contribute to additional GDP growth in the medium/long run. Other measures such as traffic levels and car registrations are pointing in the right direction. On top of that, reforms are underway and their pace accelerating (stability law, jobs act).

Last but not least the Senate approved on March 24th the Popolari reform. The next milestone would be the creation of a state-backed “bad bank”. The Renzi government is enjoying positive momentum and is showing strong commitment with a busy agenda. The Milan “Expo” 2015 which opens on May 1st could be the symbol of this recovery.

Even if the country may not be out of the woods yet, the worst is over and the economy is stabilizing as the bottoming out process continues. While volatility is still expected in the market this year, the risk/reward looks very attractive. The Italian market is a value call in the Euro-zone recovery: valuations are still cheap and the dividend yield spread to the BTP has never been so high.

Despite its strong run since the beginning of the year, we still see upside potential in the market. The rationale behind a bullish case for Italy is supported by the following factors. First, a better than expected earnings season with positive revisions underway. Second, attractive valuations and yields in absolute and relative terms. Third, a proactive government with a range of policies to boost economic activity.

Fourth, M&A activity, with several major deals emerging in the last few weeks (Pirelli, World Duty Free, Yoox, Sorin) and a wave of consolidation in the cooperative banks now expected.

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