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Bubble risks loom for Italy's small caps as new fund scheme sparks rally

Thu 4th May, 2017 2:44pm
* Shares of Italy's smaller firms on a tear 
    * Italian small-caps now outpacing all major EU markets 
    * Tax-saving fund scheme cited as main driver 
    * Italian asset managers see robust inflows 
    * "Don't be greedy," Citi warns clients 
    By Maria Pia Quaglia and Danilo Masoni 
    MILAN, May 4 (Reuters) - Italian banks and asset managers 
are rushing to tap a 10 billion-euro ($11 billion) wave of money 
expected to flow into small- and mid-caps, as clients seek tax 
breaks on investments in a government-sponsored plan, 
potentially creating a bubble. 
    The scheme, called Piano Individuale di Risparmio (PIR), 
offers tax savings if part of the money is invested into 
small-sized domestic stocks and locked in for five years. 
    Final details are still missing but that has not stopped a 
rush that has sent indexes tracking Italy's small-caps to 
all-time highs, easily outpacing the country's bluechips 
 .FTMIB  and peers in other European markets. 
    PIR, along with easing political risks and a brighter 
economic outlook, is also drawing money into Italian asset 
    Analysts at Bank of America Merrill Lynch noted that inflows 
at Italian fund managers were outperforming those seen in the 
industry elsewhere in the region, adding that PIR could give the 
Italian fund industry a "new lease of life". 
    However, the rapid rally in small-caps and rush of funds is 
sparking worries about a price bubble forming as valuations 
diverge from fundamentals. 
    The rally, which gained steam at the start of 2017, has 
lifted valuations of some industrial companies to extreme levels 
that are usually a privilege of top luxury groups like Ferrari 
    Italy's STAR index  .FTSTAR , which tracks companies worth 1 
billion euros or less, is up 29 percent this year to record 
highs, leaving behind peers in France  .CACMS  or Germany 
 .MDAX  where gains are less than half that. Pan-European small 
caps  .SCXP  are up 12 percent.  
    "The risk of a bubble is there: a lot of money is rapidly 
flowing," Banca Mediolanum  BMED.MI  CEO Massimo Doris said at a 
conference. His firm, one of Italy's biggest asset gatherers, 
has already launched funds that are compliant with the tax break 
    Only six months ago Italy's smaller firms were off limits 
for overseas investors, who feared political turmoil in the euro 
zone could leave them trapped in illiquid stocks.  
    But a conference this year where executives from STAR-listed 
companies presented to investors saw a record number of meetings 
involving more than 100 foreign investment houses including from 
France, Switzerland, Germany, the Nordics and the United States. 
    "Our advice is 'enjoy the rally but don't be greedy'," said 
Citi's Mauro Baragiola, the first analyst at a foreign brokerage 
to warn clients about a potential bubble. 
    Valuations are getting stretched, leaving little room for 
disappointment on the earnings front.     
    Alessandro Pacchiani, head of asset management at Banca 
Ifigest in Milan said there were high risks of significant 
corrections, especially for firms listed in the STAR segment, 
where some multiples were "too generous".     
    "We hope the market will start to be selective," he said. 
    According to Exane BNP Paribas, companies like industrial 
machinery producer IMA  IMAI.MI , pump maker Interpump  ITPG.MI  
and Datalogic  DAL.MI , which makes bar code readers, have 
already reached peak multiples. 
    These companies are priced at 27-33 times earnings, more 
than twice as much as the average for the STAR index they are 
listed on. As a whole the STAR is still cheaper than its German 
and French peers.  
    One hope is that the rally in small-caps stokes the market 
for new listings and share sales as entrepreneurs tap investor 
enthusiasm to raise new capital when valuations are high. 
    A fresh supply of shares coming to the market may lessen the 
risk of overheating. 
    "If IPOs and share sales grow any bubble would deflate, 
multiplying opportunities and attracting institutional investors 
from abroad," Mediolanum's Doris said.  
($1 = 0.9173 euros) 
 (Additional reporting by Helen Reid in London; editing by 
Andrew Roche) 
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