Italian deadlock: the managers positioned to profit

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The Italian election stalemate has reignited fears over Europe’s ability to overcome its sovereign debt and financial sector crisis.

But the managers that Citywire Global spoke to were rather positive on the whole event, with one long/short manager getting his Italian bets spot on a long-only manager meanwhile does not regret doubling his exposure to the country weeks before the election.

View from France

French boutique manager Marc Favard, who runs the Amilton Convictions Europe fund, remains bullish on the country's prospects despite the election deadlock.

‘What the Italian people showed was that they were not happy with those in power and that they did not trust them.

‘I believe the parties will have to get on and reach an understanding. The party that got the most votes led by Beppe Grillo is not a nationalist party and they are relatively sensible people.'

The Paris-based manager told Citywire Global he had doubled his exposure to Italy at the end of January to 12% of his fund's assets and has Italian companies like Luxottica among his top holdings.

‘The bet was that on looking at Italy’s fundamentals the market was undervalued when you compare it to France, and we don’t think that will change following this result.’

‘Now we are going to be a bit more prudent and let the markets digest the news. Today we are taking a pause and have to analyse it but I believe Italy is likely to form a coalition government. Is this the time to sell out of Italy? I don’t think so, we just have to let things settle.’

Favard said he recently sold out of key French stocks in favour of Italy, selling out of French bank Société Générale and increasing his exposure to Italian financials  Intesa and Mediobanca.

‘It is not that we have a particular focus on banks but they were undervalued,’ he said.

View from Switzerland

Former Alt Ucits A-rated manager Maurizio Novelli, who runs the €595 million Zest Global Strategy fund, was on the right side of the market move but expects a long period of weakness to persist.

'From our portfolio perspective we have a short position in the European equity markets, which we started two months ago. So the last few hours for us have been quite positive in terms of what is going on in the market and in terms of the fact we are also short the Italian and French markets.'

'This kind of situation serves to produce high uncertainty in Europe once again and we will definitely see that uncertainty in the foreign exchange markets in next few weeks as well. We have had a long position in the euro against the Japanese yen and sterling but fortunately we closed that very recently.'

'I think the Italian situation could be the start of a bigger problem in particular for Germany and the fiscal policies Northern Europe is trying to impose on Southern Europe. Italy could be a turning point when it comes to the approach they were trying to impose and this will be felt most readily in the equity markets in the next few months.'

View from Italy

Frenchman and Citywire AAA rated manager Gilles Guibout is weighing up what the election fallout means for Italian companies with global exposure in his AXA WF Framlington Italy fund.

‘The broad market has taken a hit. Sovereign debt related stocks (financials, utilities) could also suffer from the uncertainty. On the other side, we continue to look for companies with global exposure and in the short term these could benefit from euro weakness.”

‘The main outcome from Italy’s election is a new round of uncertainty.  If a coalition is not possible, we should have new elections by the end of the year.  In the meantime, we could have a technical government working on electoral law reform.’

‘In this second round, it will be crucial to understand the 5 Star Movement’s manifesto and what they stand for. Up to now its raison d'etre has been to protest against corruption and old fashion politicians.’

View from Germany

German manager Michael Schmidt, head of European equities for Union Investment, is hoping the reforms put in place by Mario Monti to get Italy out of its crisis will be continued.

‘I think a Monti-Besani result would definitely have been the best outcome possible. This would suggest that those promoting the euro zone and progression have the upper hand in the coalition.’

‘If we get a continuation of the policies that Monti started, then this is the best that we could hope for as the challenges are great.’

‘The worst case is if you get a government that would put all current commitments (regarding austerity measures) into jeopardy. I think then foreign investors will vote with their feet and extract their investments.’