One driver for the continued success of Italy’s equity markets is the 2017 PIR (Piano Individuale Risparmio) framework, a little known tax reform outside of the country will likely support the country’s IPO market in particular this year, no matter what kind of government eventually takes power.
Simply put, PIRs are equivalent to individual savings accounts in the UK and give investors in asset management companies a full exemption from 26% capital gains tax if funds are invested in a small and mid-cap Italian company and locked in for five years.
None of the parties campaigned on PIRs and there is no suggestion that any of them want to remove the innovation, which has been far more successful than had originally been expected.
Around €10bn was invested in PIRs in 2017 compared with an initial government estimate of €1.5bn.
The inflows into PIRs last year would suggest that the reforms have created a buoyant domestic investor base for Italian companies looking to raise equity capital, which in turn has encouraged more small and mid-cap Italian companies to come to market.
Outflows from PIRs are also unlikely because savers lose the tax advantages if they do not keep capital invested in the funds for at least five years, so there is still a large pool of investor capital to put to work in Italy.
Aside from just the growth of PIRs, 2017 was a truly remarkable year for the Italian equity market.
In 2017 there was €23bn of equity issuance in Italy, according to dialogic data, up 251% from the €6.55bn issued in 2016.
While some of this was spurred on by jumbo deals, such as the rights issue of Unicredit and the IPO of tyre manufacturer Pirelli, it shows a remarkable and growing confidence in the Italian economic turnaround, a sentiment that was not driven by politics and is unlikely to be put off by anything short of political collapse.
Coping with the nightmare
Even the nightmare scenario of a Five Star/ Northern League coalition would not necessarily lead to the euro crisis that some commentators are predicting — neither party campaigned on withdrawing Italy from the signal currency.
Even if Italy’s new government did strike an anti-EU tone it might not be enough to put investors off investing in the Italian recovery and despite being just two days after an uncertain election, the FTSE MIB is back trading above pre-election levels.
Critics might say that a politically unpalatable government in Italy might turn investors off the country, but this has not been the case in other nations.
US equity markets soared during the first year of the highly unorthodox Trump presidency, which included a summer of fretting over the prospect of nuclear war between the US and North Korea, both Putin’s Russia and Erdogan’s Turkey remain compelling investment opportunities for many portfolio managers and at the end of 2017 even UK markets were trading at historically high levels, despite the country heading towards what looks like a messy and harmful Brexit in 2019.
Markets have shown real fortitude in shaking off political shocks and equity investors are likely to persevere with Italy even if an unsavoury government comes to power this year.