Italy’s main stock exchange, the Borsa Italiana in Milan, was the best performing bourse in Europe last year, and one of the best worldwide. CEO Raffaele Jerusalmi explains the strengths of both the bourse – including its innovative Elite program – and Italy itself for international investors and enterprises.
Considering diverging monetary policies and the vulnerability of emerging markets due to the increase of interest rates, are economically developed countries back at the core of global investment trends?
The global economic outlook at the moment is very difficult to catch because it’s not just the diverging monetary policies; there is a general lack of liquidity in the markets. There have been reforms made in the banking sector to limit the amount of capital allocated towards market-making activity and this has limited the ability of the banks to participate in the market to some extent.
Massive liquidation, like the ones we have seen at the end of last year and at the beginning of this year, is clearly creating a problem, and the volatility that we see today is something that, in my opinion, will continue for many more years unless something changes in banking regulation.
At the moment the problem is the disconnection between the investors and the market in the sense that when investors decide to divest their interests, they hardly find available liquidity like there was in the past. So there is an extreme vulnerability in the market place in general, and this is a key issue for us as a trading market venue; it must be dealt with. In the past, the market was able to mitigate this kind of massive liquidation effect because capital formation in the banking sector was different and there was a lot of capital available. But this is not the case anymore. If we take a look at inventories in the corporate market, they have decreased by 80% since 2007. This means that basically there is no more inventory in the banking sector for corporate bonds.
Even if we created a market that is accessible to all, where everybody is connected to the platform, it would be difficult to mitigate this problem effectively because the banks – who once were the main players – have disappeared in some ways.
With regards to the diverging monetary policies, there is a general willingness from the central banks to have weak currencies. Especially in the Western economy, the process of devaluation that most central banks seek is therefore real; it is very important to have a weak currency, especially for export-driven economies.
Looking at the banking system in Italy, is it solid enough to override this increasing volatility that the country is experiencing?
Absolutely. The problem is that there are many different ways to measure the solidity of the banking system. It is a question of trend in terms of communication. When using more appropriate metrics to analyze the stability of a banking system the result will portray that Italy’s performance is better than most European countries. We have very low leverage and the crisis was caused by the excess of leverage, not by non-performing loans that are covered almost completely by the collateral in reserve of Italian banks.
The Italian banking sector is very solid. The problem is that the system in general is very unstable. The equity of a bank could go to zero and still remain very solid, but the perception of a saver that sees the equity collapsing will induce him to withdraw his money, despite the fact that the bank itself is extremely solid. If these withdrawals are made in a short period of time this will lead to bankruptcy. We need to make sure that there is proper communication. This was inappropriately managed by regulators when announcing the bail-in. Communication was insufficient. A transition period should have been introduced instead of creating retroactive measures.
Other than that, the banking system in Europe remains quite strong, with some exceptions which are to be found in banks with a high level of leverage.
Italy is finally coming out from a seven-year crisis, the longest since World War II, and expectations for growth in 2016 are set at +1.6%. What would you say were the main highlights of 2015 in terms of the Italian stock market?
2015 was a very good year for the stock market in Italy. Our country was actually the best performer in the Western economy. What I would underline about last year is the fact that Italy was able to emerge from a very deep recession that was extremely painful and strongly hit the financial sector. Italian banks were not leveraged and did not get any State support – with one exception involving Monte dei Paschi di Siena.
The financial sector in Italy is composed mainly of SMEs that rely on the banking system to continue their activities. The credit crunch for those companies lead to a very negative effect; many of them in fact went bankrupt, not because their business was not solid but because of their inability to access credit.
Same thing happens to a bank if their customers withdraw their deposits. It’s like an engine running out of oil. This caused one of the biggest crises in terms GDP contraction. However, the fact that we were able to come out stronger than we were in the past is good news.
Can you tell us more about the innovative Elite program?
We spent almost 15 years trying to convince Italian entrepreneurs to turn their private companies into public listed ones in order to raise capital in the market, but we realized that there was a cultural issue that needed to be solved. It took us a long time to understand that we needed to create a softer measure to allow Italian entrepreneurs to approach the market.
We decided to create this program which is, first of all, educational and that put together entrepreneurs and investors on the same platform from the very beginning. In cooperation with some universities, in order to create a teaching and training program we aimed to help these companies build a proper structure and provide them with the ability – within a maximum of three years – to gain access to the capital market. We require that a company has a solid organizational structure; this has been the cause of why many Italian companies have needed to rely on bank loans or banking support, in almost 90% of the cases, instead of having a more balanced capital portfolio.
The program conveys that companies must rely on a structure that is composed of 50% banking loans and 50% equities, or 50% banking loans and a combination between equities and debt. The Elite program has been very successful. Elite is the alternative road for companies to find capital to thrive. Of course, as the name suggests, this program cannot be applied to all the companies but only those that are proving to be good already. We set parameters of eligibility to participate in this program, for example a 15% growth rate, at least 15% of the revenues need to come from export activities, and an existing activity of at least 6-7 years excluding the start-up year.
What is your personal perspective towards the government’s agenda in terms of incentivizing private companies to go public or the real estate investment trust reform?
The government is making good progress but we have to recuperate a lot of time. This government is probably the first one that is effectively addressing this issue in a serious way.
A number of reforms have been carried out and this has brought progress in different areas. The government is vocal in its statement about the importance of the capital market in general, and is trying to show that they are the first to believe in what we are doing. One further thing that they could do is to get rid of the financial transaction tax, which is providing very little income in terms of tax revenues. Actually the net effect is probably negative according to some estimates made by some of the financial players – and I find it absurd that a country introduced a tax to discourage both international and domestic investors from buying companies listed in the home market.
If we look at expectations for 2016, we have already heard rumors of future listings in different sectors - especially fashion and infrastructure. Could Italy become a hotbed for IPOs and are there other sectors involved?
Of course. We are trying to leverage on the success that we had during the last few years, especially in the luxury and fashion industry, but we are obviously expanding our scope to include also food, design and other sectors that are very much linked to the concept of Made in Italy.
We think that there is a real chance to enlarge the number of companies listed in those areas, because if you take Made in Italy as a broader term there are a huge number of companies that could be listed. You know, our market is probably one of the two leading markets – along with France – in the world when it comes to luxury and fashion manufactory and brand recognition.
The TTIP is currently a hot topic. The US is probably Italy’s greatest trade partner outside the euro zone. What would your message be to the American institutional investment community to come and invest here in Italy?
Italy offers an ideal combination of circumstances: our government is moving forward with reform. If the right reforms are introduced, there is huge potential for growth. For instance the labor reform has made Italy a very attractive market.
If we look at new companies that are coming from abroad to invest in Italy we recognize the signs of change. The new labor reform is effectively creating a lot of competitiveness for companies that currently operate in Italy. Our labor cost is probably the lowest in Europe and it is highly skilled. So there are huge opportunities to invest in Italy. It is possible to invest in companies that carry out international business, that are run by very capable managers. The big bet consists in unlocking their potential which would allow them to positively explode in the right direction.
Watching what is going on now and watching the evolution in the European landscape, Italy finds itself in the best place to take advantage of the current situation.
Usually consumption estimates in Italy are low by definition. The fact that domestic consumption and consumer trust are on the rise are good signs that can probably be attributed to some of the initiatives taken by the government, like the additional €80 on the pay slip or the reduction of some of the taxes like the one on your first home. Reducing the tax burden is one of the main challenges of this government, which is way too high at the moment whether it is corporate or individual. By doing so, Italy could be repositioned as one of the most competitive countries in Europe.