Political uncertainty within Europe has a less significant impact on stock markets in the region than share price movement in financials stocks, according to Aviva Investors Management.
Speaking to journalists in London, Peter Fitzgerald, global head of multi-assets at Aviva admitted that valuation of European equities look cheap, mainly due to depressed European financials stocks.
“I do not think the market is pricing in significant political uncertainties in European equities,” he said. “One of the principal reasons for European equities being cheap is because of contagion from European financial stocks.”
Italian equities are down 20% year to date, Fitzgerald said, however the uncertainty brought by the Italian Referendum in December 4 is not the main contributor to the decline.
“We believe that Italian referendum is not a significant market,” said Fitzgerald.
Is the Banking System in Trouble?
The health of the European banking system has been under questions in 2016 as low interest rates in the Eurozone continue to put pressure on the profits of European banks against the backdrop of a weak European economy. Besides the warning of a lack of capital in German Deutsche Bank (DBK) in September this year, the Italian banking system is also deeply troubled.
The Italian banking system is rated poor by Morningstar’s banking system assessment, indicating that it is an unstable system and that the banks did not have a competitive advantage over peers operating in the wide region.
“Despite the fact that the US banks look more expensive versus European banks, I certainly feel more comfortable allocating capital to US banks than I would in European banks,” said Fitzgerald.
Fitzgerald said his portfolio has no allocation to banking stocks in Europe. His European exposure includes resources companies BHP Billiton (BLT) and Rio Tinto (RIO).
One of the biggest questions that arose from the Italian Referendum was the impact it could have upon the Italian banking system. Italian bank Monte dei Paschi (MPIN) is in the middle of a recapitalisation and bank rescue plan, of which the plan might be affected by the nation’s insecurity following the referendum.
Stephen Ellis, director of financial services equity research at Morningstar believes the outcome of Italian referendum is neither a Brexit nor a Trump moment for European investors, as Italian politicians have been aware of this possible outcome since the summer, and they have been clear on the next steps needed.
“Given the reduced uncertainty and expectation that the Italian status quo will be maintained, even if we see it as less than ideal, we would Italian banks to aggressively move forward with planned capital raises and start down the path of banking system reform, as ultimately it will be beneficial to Italy’s economy as well,” said Ellis.
Fitzgerald added that despite he believed Italian banking crisis is a risk, but it is more of a domestic issue than a global one. The direct risk of a global banking crisis is now lower than it was in the 2008 Lehman crisis as the US authorities have effectively recapitalised and built up their banks.
“We are having this discussion about banks’ recapitalisation in Europe almost 10 years later, which shows the reality that they have just been too slow to address the issues in their banks,” said Fitzgerald.
