Stuart Mitchell’s big Italy play pays off
Under-pressure Italy has become a major overweight position for fund manager Stuart Mitchell in the hope the market is underestimating an earnings recovery.
The manager of the Dublin-based SWMC European fund said he now held 13.4 per cent in Italy, compared with just 3.5 per cent on his benchmark MSCI Europe index.
Italy entered a technical recession – two consecutive quarters of negative growth – last year and plateaued at zero growth in Q4 of 2014.
Meanwhile the MSCI Italy index has underperformed rivals, gaining 9.4 per cent in the past year – lower than equivalent Spanish, Irish and broader European indices, according to data from FE Analytics.
Mr Mitchell said investors in Italy were “materially underestimating the earnings recovery under way in the country”.
The manager said the country had made positive changes in terms of internal policy, while macroeconomic tailwinds in Europe, such as lower oil prices and a weak euro encouraging exports, would spur the country further.
Key stocks the manager holds are bank Intesa Sanpaolo, Telecom Italia and commercial broadcaster Mediaset - all of which have seen at least a 20 per cent appreciation in their share prices year-to-date.
Mr Mitchell said a recent meeting with Intesa’s chief executive showed it was “clear the economy is beginning to recover rapidly”.
“We saw Intesa a few months ago and the company expected no loan growth, but we are now talking about 3 per cent to 6 per cent loan growth,” he said.
“Lending margins have increased significantly and are now correctly priced for risk.
“Hence even with the collateral requirements, large retail banks like Intesa Sanpaolo should be able to make very strong returns – similar to those made prior to the crisis.
“The bank also confidently increased the 2014 dividend by 40 per cent.”
In terms of Telecom Italia, the manager said there had been a “rising optimism” among European telecoms companies generally, with expectations of pressures easing just around the corner.
“Regulation is becoming more benign and allowing consolidation from four operators to three in individual markets – such as what we have seen in Germany, Austria and Ireland,” he said.
“The UK looks to be next, while Italy should not be too far behind. The new fibre-to-the-kerb technology is also a very important development.
“Current share prices imply groups such as Telecom Italia will disappear in seven years, and the disruptors will continue to gain market share.
“But we think the market shares and revenues of the large telecoms will begin to stabilise now the companies can offer a competitive broadband product.”
Mediaset has risen roughly 21 per cent year to date, driven in part by a sharp pickup in Italian advertising revenues since the end of last year.
“This company excites us as it arguably has the strongest television franchise in the world, with 30 per cent of all audiences and more than 60 per cent of all television advertising in the country,” Mr Mitchell said.
“As it is in the Italian language, it is also in a unique position to produce its own programming.”
OTHER MANAGERS WITH PUNCHY BETS ON ITALIAN COMPANIES
Neptune European Opportunities
Rob Burnett
The Neptune manager has a massive 35 per cent in Italy, with a large chunk of this in Italian banks. Banca Popolare Di Milano, Credito Valtellinese and Banca Popolare dell’Emilia Romagna are among such stocks in his top 10 holdings. The country is by far the largest country exposure and is the largest in his European Income fund, too.
Argonaut European Alpha
Barry Norris and Greg Bennett
Norris and Bennett are also keen on Italy, which makes up 16 per cent of their portfolio and also has a skew towards financials. The fund had Intesa Sanpaolo as its top holding at 6.4 per cent at the end of February. The managers expect the eurozone to see a return to “respectable economic growth this year”, prompting an acceleration in profit growth.
SanlamFour Active European ex UK Equity
Dino Fuschillo and Marco Ricci
Luxury yacht company Azimut is among the companies which makes up the managers’ 16 per cent exposure to the country – a large overweight compared with the 5 per cent in its benchmark MSCI Europe ex UK index. Like the other managers, the bank Intesa Sanpaolo also features in top 10 holdings, showing that the bank is becoming more popular among European managers.
