Italy votes no – buy shares

Peter Stephens — Mon, 05 Dec 2016 11:45:27 +0000

At the time of writing, the FTSE 100 is up by around 20 points following Italy’s referendum result. However, the resignation of Italy’s prime minister is likely to cause a significant amount of uncertainty in the eurozone and in global stock markets. As such, share prices could fall and remain highly volatile over the coming weeks, which may make this an excellent buying opportunity.

An uncertain future

Since Italy is the third biggest economy within the Eurozone, its performance matters. While today’s result wasn’t a major surprise given recent polls, it means that the country’s future is highly uncertain. Confidence in Italy’s future is likely to move lower, since there’s a chance that a new PM and government could lead the country out of the eurozone.

At a time when the single currency is relatively weak and the EU’s future is somewhat uncertain following Brexit, this could lead to share price falls in the near term. When added to the potential for a less pro-EU president in France, elections in Germany and a general feeling that the eurozone is simply not working out in an economic sense, a fall in investor confidence seems likely.

Share price reaction

While the FTSE 100 has held up well in the hours following the referendum, the reality is that a fall is likely. Next year was already shaping up to be one of the most difficult for a number of years. A new, radical US president, Brexit, a slowdown in China and now further weakness for the EU and eurozone mean that the outlook for investors is downbeat.

In addition, global stock markets aren’t historically cheap at the present time. The S&P 500 is near its record high, while the FTSE 100 has held up well in recent months thanks in part to sterling’s weakness. It seems unlikely that such high valuations can be maintained if the future of the euro is now going to be called into question. After all, it’s one of the three most important regions of the world from an economic and political perspective alongside the US and China.

Investor reaction

One response of investors to this uncertainty could be to sell up and hold cash in order to weather the storm. However, the reality is that inflation is rising and interest rates in the UK are unlikely to increase for fear of choking off a recovery following the EU referendum. Therefore, a negative real-terms return on cash is on the cards.

As such, buying shares remains a good long-term play. Furthermore, if the FTSE 100 and other indices fall following the Italian referendum (which seems likely) then it could be possible to buy high quality stocks at discounted prices. In the short run, they may be exceptionally volatile and cause a degree of fear among their holders. However, in the long run they offer high returns, since history tells us that it’s during the most uncertain times that the best buys are generally made.

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Could Sunday’s Italian referendum be a great buying opportunity for UK banks?

Harvey Jones — Fri, 02 Dec 2016 12:18:36 +0000

This weekend, all eyes will be on Italy. That might seem odd, given that Sunday’s referendum is on an arcane constitutional issue, rather than something fundamental like Brexit or Trump. The nation is voting on proposals to allow the Chamber of Deputies to pass laws without consultating the Senate, in a bid to speed up the country’s sluggish lawmaking processes.

Five Star Grillo

So what’s that got to do with the price of British eggs, or British banks for that matter? If the reforms are rejected, as seems likely, prime minister Matteo Renzi has said he will resign. This will be seen as yet another victory for the populist forces, and could lead to an election victory for comedian Beppe Grillo’s Five Star Movement, which wants a referendum on leaving the EU (sounds familiar?) The election could come next spring, and no later than early 2018.

Still can’t see the implications for UK banks? Well, you may have noticed that the Italian banking sector is in a mess, with €360bn of non-performing loans. A No vote will make it even harder to sort this out. Renzi is a reformer, who’s looking to build a more stable political system, and a defeat on Sunday will halt this process.

Eurozone groans

It will also add growing concerns about the Italian banks. Unicredit (Italy’s biggest) and Banca Monte dei Paschi di Siena (Italy’s most indebted) are looking to raise capital in December, and this could make their task harder. Unicredit has lost two-thirds of its stock market value this year. Plans to recapitalise Monte dei Paschi could collapse if the vote leads to months of political turmoil. Other banks, notably MPS, Veneto Banca, or Popolare di Vicenza could get sucked into the vortex.

The Italian government could even face the humiliation of asking the European Central Bank to back a €40bn bailout, which must be approved by the German Bundestag and other eurozone parliaments. Some commentators have argued that the Italian banking crisis could finally sink the single currency as Italy isn’t the only country with a banking problem. Just look at Deutsche Bank.

The Italian bank job

The UK isn’t in the euro and British banks aren’t in the same disastrous state as their Italian counterparts, despite RBS failing a stress test this week. Bad loans amount to less 1.5% of book value in the UK but are 12 times higher at 18% in Italy.

Yet I will still be watching out for Sunday’s result, and keeping a beady eye on the impact on UK banks such as Barclays, Lloyds Banking Group and others on Monday. The sector has had a patchy 2016. Barclays is trailing 7% lower than a year ago (although it’s up 27% in the last three months), Lloyds is down 22%. I reckon that Lloyds looks particularly tempting, trading at 6.78 times earnings and yielding 3.92%.

If ripples do wash across the Channel from Italy, this could be a buying opportunity. Should Italy stumble into a full-blown banking crisis, the buying opportunity could become even greater. But then, so could the dangers.

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