Posted inSOUTHERN EUROPE

Market Insight 2012 Q2 Italy

The arrival in November of a technocratic government led by Mario Monti has convinced many investors the country finally has an administration that is willing and able to implement long-overdue political and economic reforms.

Meanwhile, European banks, fuelled by borrowing from the ECB’s longer-term refinancing operation, have responded to the mood of optimism by buying larger quantities of government debt. Demand for ten-year sovereign bonds caused yields to fall below 5% in early March – the first time they had dropped below this level in about six months, and well below the 7%-plus yields seen at the end of 2011. Two-year yields also declined sharply in recent months.

News Roundup
• The CGIL, Italy’s largest trade union federation, has called a one-day strike in response to prime minister Mario Monti’s decision to continue with labour market reforms, which allow companies to sack employees more easily. Ten years ago, the federation organised the largest demonstration in the country’s history, in protest at proposed reforms by Silvio Berlusconi.
• The former head of UniCredit, Italy’s largest bank by assets, is likely to be appointed chairman of Banca Monte dei Paschi di Siena. Alessandro Profumo, who left UniCredit in 2010, has been put forward for the role by Monte dei Paschi’s largest shareholder.
• Audi, part of the Volkswagen group, is in talks to acquire Italian motorbike manufacturer Ducati from its private equity owner, Investindustrial. According to reports, Investindustrial hired Goldman Sachs and Deutsche Bank last year to look at the possibility of floating Ducati in Hong Kong, but a sale is now preferred.
• Shares in Italian tyre-maker Pirelli rose strongly in March, after the company raised its operating profit margin forecast for 2012. Pirelli said it expects its margins on earnings to be 12% or higher this year, up from 11% to 12%, and attributed the increase to its focus on the premium segment and improvements to its manufacturing presence in rapidly- growing economies.

Hot Topics
What everyone is talking about
• Corporate bonds – high yield or investment grade?
• Government bonds – the need for real returns
• Equities – will the US stock market deliver?
• Emerging markets – rising demand for country-specific funds

Q4 outflows

This upswing in sentiment will be a relief to domestic asset managers, after they suffered outflows of €23bn in the final three months of last year – representing about 95% of all money withdrawn by Italian investors during the fourth quarter, and more than half of total outflows for 2011. Looking at collective investment schemes, open-ended funds were hardest hit, registering outflows of some €18bn in Q4, while closed-ended funds enjoyed inflows of just over €1bn.

At the asset class level, investors displayed an aversion to most mainstream options and fixed income in particular, as bonds saw outflows of almost €8bn, up from less than €2bn in the third quarter.

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Cash investments suffered outflows of €5bn, while flexible and balanced strategies each lost €4bn. The only asset class to see inflows during the period was real estate, which gained €1bn.

 

Government bonds

Our research, conducted in February, found Italian fund buyers now view peripheral European sovereign bonds as attractive. Half of the investors we spoke to said they intended to boost their allocations to the periphery over the next 12 months. In contrast, just one-fifth expected to increase their exposure to debt issued by core nations such as Germany, suggesting the additional returns on offer in the periphery are sufficient to justify the extra risk.

Looking outside of Europe, investors are also upbeat on emerging market debt, with 60% intending to increase their allocations, and none seeking to reduce their weighting.

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However, there was a notable lack of appetite for US government bonds, with some investors saying they could find better opportunities elsewhere. None of our interviewees expected to increase their exposure to treasuries, while 70% were neutral on the asset class.

 

Corporate bonds

All of the investors we spoke to said they would increase their allocations to corporate debt. However, this sentiment often related specifically to high-yield securities, reflecting their desire for higher returns than those available elsewhere in the fixed income sector. In particular, interviewees favoured shorter- duration securities with maturities of less than one year, suggesting instruments with lower volatility remain attractive.

Global equities

Despite ambivalence towards America’s government bonds, there was support for its equities, with almost 60% of investors planning to up their exposure to the US stock market. They were also upbeat on emerging market equities, although some were concerned that the theme may have run its course. In addition, interviewees appear to be discriminating more clearly between emerging market regions, with some turning to country-specific strategies.

There was a broadly positive view on European equities, with 70% of investors expecting to increase their exposure. As with the sovereign bond market, interviewees were particularly enthused by the opportunities available in the peripheral countries. Within the core, they were most upbeat on the outlook for multinationals exporting outside of the EU.

Alternatives

There were mixed messages on commodities, with interviewees evenly split between those intent on increasing their exposure and those who planned to maintain their allocations over the next 12 months. Investors were also keen to distinguish between individual commodities, rather than treating them as a single asset class. Several expressed the view that the price of oil would rise this year, while others were building their gold exposure following a price correction.

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tom@ybc.tv

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