From books to banks: Investors place bets against Italy meltdown
23/11/2016 18:33
By Danilo Masoni
MILAN, Nov 23 (Reuters) - A few brave fund managers are
swimming against the outgoing tide of investment in Italy,
convinced that the expected failure of Prime Minister Matteo
Renzi's constitutional referendum on Dec. 4 will offer buying
opportunities as others flee.
Italian stocks have lost nearly a quarter of their value
this year, and government bonds are also under attack, as the
nation nears a referendum that, if the polls are correct, could
prompt Renzi to quit, his government to crumble and the euro to
take a hit.
Fund managers and market analysts expect the sell-off to
intensify if Renzi's signature reform - reducing the Senate's
powers to block legislation - sinks. But some funds are betting
that the market's worst fears are unfounded.
"Investors' mood will change for one, two or three months,
but it will not be a catastrophe if the 'No' wins," said Umberto
Borghesi of UK-based Albemarle Asset Management which is
launching an Italian equity fund four days before the vote.
"You cannot escape crises, but you can use them to your
advantage".
Borghesi, who oversees around 400 million euros ($425
million) in assets, said Albemarle planned to raise up to 60
million euros for the new fund and would focus on under-valued
stocks.
His top picks include some old-fashioned businesses such as
book publisher Mondadori MOED.MI , wood-working machinery firm
Biesse BSS.MI and another maker of industrial parts, Saes
Getters SAEI.MI - all stocks that he says are unloved,
well-managed and have products that are in demand.
Paris-based AXA Investment Managers, one of Europe's biggest
fund managers, says it is also holding its nerve. It has a 300
million euros Italian equity fund which is maintaining its
overweight position on Italian banks, viewed as the most
vulnerable to a sell-off.
"We must brace for volatility but we are not trading the
referendum. That would be like buying a lottery ticket," said
Gilles Guibout, AXA's head of European equity strategy,
explaining that the banks' outlook was not all doom and gloom.
"We make investments looking at three years, not at three
weeks."
Italy's banking industry, the euro zone's fourth largest, is
groaning under 360 billion euros in problem loans and is at risk
of a crisis unless several lenders can raise around 20 billion
euros capital quickly, a tall order given listed banks
.FTIT8300 have lost half of their value this year.
Guibout believes European authorities would not let a
full-blown crisis happen, given the integrity of the euro zone
itself could be at risk if Italian banks imploded.
"A break up of the euro zone or a bank meltdown are too big
risks to let them happen," he said, adding that he was betting
for the longer-term on banks being forced to merge and improve
profitability.
Roberto Lottici, fund manager at Milan-based Banca Ifigest,
said he was stepping up his exposure to the Italian market and
focusing on stocks that offer secure income streams, such as
utilities, or respond to different markets such as the oil
price.
His picks include grid operators Snam SRG.MI and Terna
TRN.MI , oil firm Eni ENI.MI , cable maker Prysmian PRY.MI
and the saving shares of Italy's strongest big bank, Intesa
Sanpaolo ISP.MI .
In bond markets, analysts expect the spread between Italian
government bonds and safer German bonds to widen 30 to 50 basis
points. The gap, at about 180 points, is at its widest in two
years but another 50 basis points would still leave it well
short of the chasm that opened up in 2011 and 2012.
For now, though, many investors are standing near the exits
as some European investment banks issue dark warnings.
The average short interest of Italian stocks listed on
Europe's STOXX 600 index .STOXX has grown by a third to 3
percent from January, according to IHS Markit data.
Among the most shorted Italian firms, the amount of stock
out on loan has fallen for banks UBI UBI.MI and UniCredit
CRDI.MI while it has risen for oil services firm Saipem
SPMI.MI and eyewear maker Luxottica LUX.MI . Short interest
in the broader STOXX index has risen by a smaller 20 percent to
2.6 percent.
Deutsche Bank has said a No vote could lead to a worst-case
scenario where Italy holds a euro membership referendum that
could wipe out half of the country's stock market value by early
2018.
As insurance, Albemarle's Borghesi said his new fund would
use Milan index futures to target the relative performance of
his stocks. If the wider market slumps but his stocks fall less
than the index, his fund would still make money.
"It's hard to say if markets will go up or down. But if I
pick companies with good management and products there is a good
chance they'll do better than the market," he said.
($1 = 0.9403 euros)
(Editing by Hugh Lawson)
((Danilo.Masoni@TR.com; +39-02-66129734; Reuters Messaging:
danilo.masoni.thomsonreuters.com@reuters.net))
Keywords: ITALY REFERENDUM/MARKETS