Contrarian View - Italy vs USA

The Ftse Mib is today in a difficult situation. The spread cannot fall below 300 points, while the differences between Rome and Brussels remain high. The Portuguese Mário Centeno, president of the Eurogroup, thunders: «Italy should shows commitment!» Yes, just a Portuguese and not the usual German or Dutch. Meanwhile, Minister Tria, last 'paladino' among the moderates, argues that following the EU guidelines would be suicidal.

There is still a long way to go with the European Commission implementing technical scrutiny of national budgets and rejecting the maneuver and asking to change it substantially.
Amongst Italian politicians, the belief is that the country risk, expressed in the yields of ten-year government bonds, has stabilized around 3.3% -3.5% in the last two weeks because investors today would be a bit 'less worried than before.

It is not so unfortunately: the alleged truce of sales on the BTP is a phenomenon resulting from the persistence of mistrust. It may break up at any moment, as soon as the Treasury has to collect liquidity for 2019. The gradual process of rapprochement of the spread to other Mediterranean countries like Spain (spread bonos / bund to 120) or Portugal (spread OT Portugal / BUND at 195) should have materialized quickly, but unfortunately it consolidates. We are in a difficult situation, it is difficult to imagine how it could end.

In the United States, on the other hand, "The labor market has continued to strengthen, while economic activity continues to expand at a strong pace", reads the FED (8 Nov) post-Fomc press release. The data on the US employment, the Non-Farm Payrolls of October, surprised analysts' expectations: they are excellent! Trump does not triumph in the midterm elections, but some analysts see the Democrats' victory in the House of Representatives as a positive factor: the stock exchange with the two-headed congress has historically improved better than in the single-chamber and Senate situation.

So what to do? I am a firm believer in the unpredictability of the markets and therefore when I prefigure the scenarios on share prices, I simply hypothesise what could be the best risk / return ratio for possible investments.

Defining risk as something negative by identifying it only as being responsible for potential losses, or, worse still, thinking of being able to obtain acceptable returns in its absence, are incorrect considerations. In terms of investment choices, the concept of risk must be understood in its true meaning, ie risk is a synonym of probability of a loss, but it is also the only means to receive remuneration that is due to whoever face up.

I am convinced that the quality of the trader depends not so much on the ability to analyze exactly one context. To make operational and strategic decisions, on the other hand, it is important to understand how much the prices are consistent with the context and even more important is to understand how much a market has suffered a certain situation, both in negative and positive excesses. In short, in financial markets, when the perceived risk becomes public, then, paradoxically, the risks decrease, which does not mean that dealing with a particularly risky situation must be the path of the investor, but because the risk is only reputable and not quantifiable, this estimate must be made without considering the emotions of the moment but referring to what is the intrinsic value of the best listed shares.

Recently they asked me how it was possible to hypothesize a better future of the Italian stocks compared to those of the United States of America. I replied that "share prices are always an expression of the equilibrium of the markets, and that those who buy Italian shares today must not necessarily be considered more stupid than those who buy Apple or Amazon or Google!". Investors often tend to give too much importance to recent events with a strong emotional impact, which will not necessarily be decisive for the fate of companies.

On May 7, 2018, the Ftse Mib was trading at 24,544 and gained 12.3% for the current year (excluding dividends paid). We had the most performing index in the world. Finally, investors had rediscovered our main stocks because they judged them at a discount. Following that, we all know what happened, but I it still think that all can be remediable. There are valid reasons to have some apprehensions, but are we not discounting them too much?

For 2019 I hypothesize the Italian index to outperform the Yankees!


Article written by Tony Cioli Puviani

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