Talking About Italy
Midway into the Renzi Journey
* The Jury is Still Out — While Matteo Renzi promised to change Italy in a thousand days, midway into the journey the jury is still out: Italy may be heading in the right direction but reversing decades of poor government might require a much longer period of time than PM Renzi and investors factor. We believe that the pending reform of the Senato is likely to be the turning point; if approved, the government might accelerate the reform pace while strengthening the economy.
* Tepid Tailwinds, Structural Headwinds — Citi economists believe that with GDP growth expected to be around 0.7% in 2015 and 1.3% in 2016, Italy’s underperformance is likely to persist. While we appreciate that Italy has been able to take advantage of macro tailwinds (so often missed over the past decades), we are nonetheless concerned that a tepid and uneven recovery might be empowering structural headwinds (i.e., vested interests) that are, in turn, preventing Italy from achieving the strong growth that Renzi will need to convince Italians this time is different.
* Can Italy Return to 3% plus Growth? — Italy needs stability, visibility, credibility; these conditions can be achieved only via an overhaul of the country architecture alongside legal certainties. While we see Renzi as possibly the last opportunity for a turnaround of Italy, his failure might push back Italy into being the chaotic country that disappointed for so long.
* Remain long on Italy — Sharing our strategists’ view that we are in an “old but not dead” bull market, we maintain a positive stance on Italian equities. While we can’t exclude volatility should Renzi fail to modernize the country, corporate finance might provide an interesting angle for long-term investors. Italy is full of first-class companies that are extremely
attractive for overseas investors. And the seeds for an improved economic environment might have been planted.
* What we Like — Among SMID caps, we favour Autogrill, Prysmian and Yoox – not least for possible M&A. While
Luxottica and Geox are Neutral-rated, we could turn more positive on share-price weaknesses. Among asset gatherers, our preference goes for Banca Generali and Mediolanum while we like Unicredit (focus list) and Intesa SanPaolo among traditional banks. UBI and BPER are our preferred means to take advantage of Popolari reform. Finally, A2A and Snam remain attractive in the utility industry — set to benefit from a more favorable environment in years.
* What we Like Less — Mediaset, ENEL, ENEL GreenPower and (Swiss-listed) Dufry, which is taking over WDF.