Italy, equities and the European Commission’s autumn economic forecast

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Colosseum in Rome and morning sun, ItalyOn Thursday November 8, the European Commission published its 2018 Autumn Economic forecast, predicting that in 2019 Italy’s deficit will increase to 2.9 per cent of GDP and in 2020 it is projected to reach 3.1 per cent of GDP. This would put Italy offside with EU Stability and Growth Pact’s deficit limit of three per cent of GDP.

We spoke to Andrew Clifton, portfolio specialist for European equities at T. Rowe Price who says that the EU’s forecast confirmed what he already suspected – that the Italian economy is slowing. He highlights that the Italian market has been performing quite poorly for a number of quarters.

However, he says that when focused on finding good quality companies at attractive valuations there has been some opportunity.

“In large part that is because a number of the Italian companies that we’ve invested in, they are listed in Italy and their headquarters are in Italy, but they get a relatively small amount of revenues from the Italian economy. So, they’re more of a play on global growth. And a couple of those have been performing quite poorly, so it’s giving opportunity.”

He still urges caution, particularly in certain sectors like the banking sector.

“Even a very well-managed bank is going to be finding the environment quite tough, because basically short-term borrowing costs will be going up because of the spread that is increasing due to stressors in financial markets, loan demand is not great, and the market still remains competitive,” Clifton says.

“I think you very much need to pick your areas, but in some cases there are opportunities for a long-term investor. But also, one cannot ignore the fact that the fundamentals remain quite challenging.”

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