Maria Teresa Cometto reports on how the convergence process has dramatically altered the investment scene
The trend in Italy is to family portfolios more diversified to-wards financial investments in stocks and shares and in foreign financial markets. There is an even greater commitment by financial operators - banks, insurance companies, investment companies - to the field of managed savings, which is now considered of strategic importance.
The debut of the euro in 1999 will see an acceleration in Italy of these processes which have been widespread since 1996-1997 and have flared up again during the current year.
On the Italian market, in fact, the arrival of EMU has already had its more conspicuous effects, in terms of a drastic drop in interest rates and a consequent gradual moving away of investors from fixed income investments. One only needs to look at short-term treasury bonds (BOTs) - which are the most popular 'zero coupon' government bonds with three, six, 12 months duration - which at the beginning of 1996 were yielding a yearly 8% net; nowadays their yield has halved to about 4%. In the meantime, the COMIT Index of the Italian stock exchange has registered a rise of 166%, recovering all the ground it had lost since 1986, in comparison with the other European stock exchanges. Also, the assets managed by the investment funds have increased almost fivefold, from L133,000bn to L642,000bn, as at end of June 1998.
There is a very definite relationship between these three factors. In fact, the drop in yield of government bonds has literally disoriented Italian savers who for the first time in decades have had to face the problem of diversifying their portfolio. Thus the net balance between buying and selling of government bonds by Italian families which was a negative L31,500bn in 1996, has risen to a negative L111,840bn in 1997 and the trend is continuing at an even higher pace during 1998. The savings thus 'released' have been channelled towards the investment funds and also towards individual asset management (mainly offered by banks) which has increased from L261,000bn in 1996 to about L400,000bn today.
Through investment funds and asset management, the use of these savings has been diversified towards the stock exchanges and financial markets abroad. This is confirmed by the data published by the Banca d'Italia , Italy's central bank, about the types of financial activity by families: from the end of 1996 to the end of 1997 (which are the latest available figures) the proportion of short term fixed income yielding assets (BOT and short term redeemable bonds) has dropped from 12.4% to 9.5%, whilst the share of foreign investment (directly owned foreign securities, as well as the assets of the investment funds specialised in these securities) has grown from 4.5% to 6.7%; and also, the proportion of the stockmarket securities has grown from 5.2% to 7.3%.
From a general point of view, there is a very significant drop in liquidity (cash, bank deposits on demand, savings accounts, certificates of short term deposit, BOT, short term redeemable bonds and monetary funds) from a previous 30.8% of the total gross financial activities by families to 27.2% currently. However, this liquidity still represents a huge sum - L1,100,000bn: a reserve which is bound to shrink further and continue to feed new investments towards foreign shares, the Italian stock exchange and the investment funds.
Besides the advent of the euro in 1999, two other factors will accentuate this trend in Italy: taxation on capital gains and the take-off of pension funds.
Up to June 1998, capital gains in Italy were not taxed: since July 1 this year taxation has been introduced (12.5% on gains for contracts of sale and on interest and dividends) which penalises the DIY private investors and urges them to use professional management (investment funds, asset management). Besides, those who choose managed savings are now able to compensate for any possible losses on the stock exchange with the interest received from government bonds: this is an extra stimulus to diversify part of one's portfolio into stocks and shares investments.
Also, this autumn the first 'closed' pension funds will become operative - they are the funds appointed, under union agreement, to specific categories of employees: Fonchim (funds for chemical industry employees) Fondenergia (ENI and other firms in the energy sector), the fund for Fiat managerial staff. Also, the marketing of the first 'open' pension funds will start: they are the funds directly offered by banks, insurance companies, financial management companies. All the main Italian financial operators have equipped themselves for this new type of business, and in general are changing their strategies towards giving the managed savings a more central role amongst all their activities.
On one hand, the need to meet the new requirements of the clients and, on the other, the need to compensate for the disappearance of the high profit margins previously obtained simply through the divergent trend of credit/debit rates, have urged especially the large bank groups to convert to the new role of managers of savings; and some of them are considering exploiting the opportunity with monetary union to play a role also on the European market.
For example, in two years the bank Credito Italiano has changed from an institution mainly dedicated to corporate clientele to an institution concentrated on retail and especially on managed savings: it has recently created an division asset management (Europlus) - for investments funds, asset management and pension funds - and it has transferred it to Dublin to make use of the tax relief and the lighter bureaucracy of Ireland, thus reducing its costs and preparing to launch its products in euro to be marketed also in other member countries. The success of this 'euro' project is also paramount to reaching a 20% return on equity (ROE) within the year 2001, which Credito Italiano has stated as its objective, starting from the present 11%.
Asset management divisions like the one of Credito Italiano but based in Italy, in Milan, have already been created by the Turin bank San Paolo (in the process of amalgamating with Imi-Fideuram) and the Banca Intesa (Ambroveneto-Cariplo). These two groups at the moment are doing everything on a home-base; others, in order to be more competitive both on the Italian market and, in the near future, on the European market, have formed or are about to form an alliance with foreign partners, first among them Credito Italiano which has joined forces with the US group Capital International.
However there are numerous obstacles to the trends described so far, such as the aversion to taking risks, which continues to predominate amongst average Italian savers, and, consequently, the conservatism of the institutions which represent them. Here are two examples: the first pension fund, Fonchim, has decided on an asset allocation of its funds (a single compartment of investment, valid for all the subscribers for the first three years of the fund existence) which gives a weight of 10% to monetary investments. Second example: the diversification of the global portfolio of investment funds has not changed much from 1996 to the present; the Italian government bonds continue to have the lion's share (48% today against 50% two and a half years ago) and there is little weight of both Italian securities (12.3% today, 14.8% before) and foreign securities (always around 13.5%).
Whilst the aversion to risks is a 'subjective' obstacle, there are also two objective obstacles. The first is the still very feeble stocks and shares market (the companies quoted on the stock exchange still number only about 200 and the increase in capitalisation is mainly due to the rise in market values, as well as to the two privatisations of Eni and Telecom). Secondly, the supply of government bonds is not decreasing, since the overall public debt is not decreasing.
Maria Teresa Cometto is a journalist with Corriere Delle Sera based in Milan