The last time Italian stocks were so cheap compared to global stock valuations, the Berlin Wall was still standing. The Ftse Mib has been one of the best-performing indices in 2023, with an increase of nearly 20% as of November 8th. Nevertheless, the valuations of Italian stocks as a whole, including mid and small- cap companies, have never been lower compared to the global average, at least for the last 35 years. According to an analysis published by Reuters, Italian stock valuations are at a 50% discount, the highest deviation seen since 1988. While it’s not new for Italian stocks to be undervalued compared to the global average, the gap observed in the last two months is about twice as much compared to the average of the last twenty years.
Piazza Affari (Italian Stock Exchange) Doesn’t Captivate Fund Managers
Usually, when valuations are low, fund managers sniff out buying opportunities at affordable prices allowing for potential gains. However, the latest survey of European fund managers conducted by Bank of America showed that the Italian Stock Exchange was the European market with the least upside potential in the next 12 months. In response to the question “which markets would you overweight and underweight in your portfolio” over a one-year horizon, about 45% of managers expressed a preference for underweighting Piazza Affari. In other words, the prevailing forecast for the Italian Stock Exchange is negative.
Managerial judgment is, on the other hand, strongly bullish, for the British stock exchange whose valuations have fallen to historically low levels. Following a 2023 marked by sales, British stock valuations are 33% lower than the global stock average. However, between August and October, European managers expressed the most bullish expectations for London for the upcoming year.
The Vulnerabilities of the State and the Impact on Banks
At the root of fund managers’ greater caution when it comes to Italian stocks are the historical vulnerabilities of the State, whose high debt could trigger a new increase in yields when the ECB reduces its portfolio of government bonds, letting the market increasingly determine the risk premium for Italy. The fact that an increase in the spread could affect bank securities, as has happened in the past, does not put the Italian Stock Exchange in a very attractive position for international investors. For example, Goldman Sachs believes that a 10-basis-point spread increase could reduce the market price of Italian banks by 2% and that of the Ftse Mib by 1.5%—an index that the American investment bank recommends selling after its excellent performance in the last year.
This year, the Ftse Mib index has been able to achieve a very solid performance thanks to the positive effects of interest rate hikes on large banks, whose loan margins have risen without too much effort. The Ftse Italy Banks index has recorded a performance of 34% since the beginning of the year, compared to the 18% of the Ftse All Share, which also includes medium and small-cap companies. The performance of the Italian banking sector has remained strong in the recent period, during which the latest quarterly results were published: from October 23rd to November 8th, the sectoral index gained over 3%, in line with the Ftse Mib.
There are good reasons to imagine that the easy growth quarters for bank accounts are now behind us and that the potential economic slowdown and the prospect of future interest rate cuts in 2024 could curb future gains for traditional bank stocks.
Italian Stock Exchange: Networks, Insurance, and Small Caps Most Favored
In the strategic allocation of managers surveyed by BofA, banks are essentially a “neutral” sector. In the financial sector, and in general, it is mainly insurance companies that managers bet with more conviction on future increases: since the beginning of the year, the Stoxx Insurance index has achieved a mild +3%, compared to the +14.7% of the equivalent Euro Stoxx Banks index. There would thus be more room to recover ground for insurance companies.
Even some network consulting banks, which, unlike traditional banks, have had few gains on the stock exchange in 2023, are among the stocks to buy for Bank of America analysts—who mentioned, in a note dated October 17th, buy ratings for Banca Mediolanum and Azimut.
Considering also the strong sales suffered this year by small-cap listed companies, some analysts believe that there may be greater opportunities for increases in this segment than on the main list in Milan, where traditional large banks lead the way.
