Posted inSOUTHERN EUROPE

market insight italy q2 2014

Italian fund selectors have not yet joined the Europe-wide trend of increased emerging markets equityalt='' buying. Absolute return stays the single most popular asset class by some distance, which is also reflected in recent fund flow data about the Italian market.

Capricious domestic politics are always a hotly debated topic in Italy. Just like most of their compatriots, Italian fund selectors tend to have outspoken views on the matter. As a general rule, every Expert Investor Italy there is another prime minister in charge. While fund selectors were critical about the reform-mindedness of the previous governments under Mario Monti and Enrico Letta, there is considerably more faith in the young and energetic incumbent Matteo Renzi.

Several fund selectors feel financial market faith in Italy has been restored, and that an export-led Italian economic recovery has truly begun. This positive feeling is reflected in macroeconomic sentiment. Six in 10 Italian fund selectors are upbeat about the economy.

                                                   Emerging market debt

alt=''Remarkable rebound

A majority of Italy’s fund buyers say they will buy more emerging market government bonds in the coming 12 months. Compared to last January, appetite has surged from 15% buyers to some 52%, about twice the European average. The rebound is even more spectacular considering only 6% of Italy’s fund buyers was considering to buy emerging market government debt back in October 2013.

The difference with emerging markets corporate bonds is surprisingly big though. That asset class only has 29% buyers. The sentiment spike in emerging market debt might be explained by the fact that many fund selectors are now heavily underweight the asset class, having sold much of their allocation last year.

Fund selectors our researcher spoke to during his trip to Milan said they are testing the EM water by alt=''increasing their exposure to emerging market debt first. Their preference for government debt, which tends to be denominated in local currency, might well be explained by their expectation for especially the renminbi to resume its gradual appreciation versus the dollar after its exchange rate tumbled during the first months of this year.

Emerging markets equities

Diverging from the trend

Italy is indeed the only country where emerging market debt is more popular than emerging markets equities, as most European fund selectors no longer seem to adhere to the old investor wisdom to gain exposure to emerging markets first by increasing their allocation to bonds. Sentiment is a bit more positive than in January, with 35% buyers and 13% sellers, but it is slightly below the Pan-European average.

Absolute return

Total bestseller

Italian fund selectors’ love affair with absolute return is showing no sign of abating. The asset class has consistently been the most popular of all since EIE began measuring appetite for it in May last year. Together with France, Italy has most absolute return buyers (65%) in Europe, while only 4% of interviewees do not use the asset class. Fund buyers our researcher spoke to see sustained demand for the asset class with retail clients. One of them said retail investors seem to understand absolute return much better now than a couple of years ago. The popularity of the asset class is reflected in fund flows. According to branch organisation Assogestioni, more than half of net inflows in Italy in May and June went into absolute return and flexible funds.

European equities

Retaining some attractiveness

alt=''Like in all European countries, European equity sentiment has cooled down in Italy as well. But sentiment is still comfortably on the positive side. Four in 10 fund selectors still say they will buy more European stocks. That appetite for the asset class is the lowest in three years probably means most fund selectors are overweight European equities right now. Still, only one interviewee is considering to decrease allocation.

Japanese equities

Strong views

Milan-based fund selectors had surprisingly strong views on Japanese equities when our researcher came over to visit them this spring. While most European fund selectors do not seem to care too much about the asset class and enthusiasm is declining, appetite is on the rise in Italy. More than a quarter of interviewees said they are going to increase their exposure to Japanese stocks, making it the country with most Japanese equity bulls in Europe and one of only two where net sentiment is not negative. Still, like in all but one country, ‘hold’ is the dominant choice of fund selectors, reflecting worries about Japan’s ability to turn things around and about the strength of Japan’s currency.

US equities

Buyers nowhere to be seen

Nowhere in Europe appetite for US equities is as low as it is in Italy. The country’s fund selectors have never been overenthusiastic about the asset class, but sentiment tumbled in the first half of this year from 19% buyers in January to just 4% in June. Like in most other European countries, an overwhelming majority of fund buyers are planning to keep their allocation to the asset class stable. In the case of Italy, it is a whole 70%.

Part of the Bonhill Group.