The new Italian tax policies could favour investments in Italy Mid Cap stocks
Generally, investing in smaller companies is riskier than investing in larger companies. Large caps tend to be less volatile during rough markets as investors fly to quality and become more risk-averse. The long-term statistics certainly suggest that smaller companies do indeed outperform larger ones.
Mid caps lie between large cap stocks and small cap stocks.
In Europe the Eurostoxx Mid Index, has historically outperformed the broader Stoxx 600 Index, and in the last bull market started in 2009, the real gap in the performance between the two indexes, started in 2013, as we can see in the graph below where it is represented in the upper side the relative strength of the Eurostoxx Mid Index versus the Stoxx 600 Index, and in the lower side the historical performance of the two indexes.
The 72% of the country weighting in the Eurostoxx Mid Index is represented by Germany, France, Spain and Italy. In the following graph, we compare the Mid index with the Mid Cap Indexes of the four countries (Germany MDAX, France CAC MID 60, Spain IBEX MID CAP, Italy FTSE ITALY MID CAP), starting from 2009.
We can note two things: the strongest Mid Cap Index is the Germany Index, and three indexes (Germany, France and Italy), have exceeded their previous peak of April 2015 in January 2017.
If we compare the performance of these indexes from 2014 we can see that, excluding Spain, we have in term of performance a similar result. But if we look to the relative strength index of the Ftse Italy Mid Cap Index vs the MDax Index, we have a breakout of the down trend line, and the performance of the Italian Index has had a remarkable recovery since the end of 2016.
One of the reasons of this behaviour could be attributed to the birth of the individual savings plans (PIR – Piani Individuali di Risparmio), a new form of investment created by the Italian Government since January 2017. It is a form of medium-term investment that is born to support the Italian economy and to ensure that household savings could support the national companies, particularly small and medium-sized enterprises. For those who keep the money invested in PIR for at least five years, there are significant tax advantages.
The same effect could be seen also on the small cap sector indexes but, as we can see from the graph below, the Ftse Italy Small Cap Index is disadvantaged in terms of performance recovery vs. the corresponding German SDAX index (but also vs. the Ftse Italy Mid Cap Index!): it is quite obvious to think that the bulk of the investment flows will be towards medium-capitalization companies, preferred by financial intermediaries delegated for the construction of PIRs, because these kind of companies are more reliable and stable than small-cap companies.
Mario Valentino GUFFANTI CFTe – SAMT Vice President – Swiss Italian Chapter – mario.guffanti@samt-org.ch
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.