While Donald Tusk and the Beeb are sending out ever more shrill warnings about how the world is going to end for the Brits on 29 March when Britain leaves the EU the two party leaders in Westminster have been meeting and presumably discussing the merits of preparing and making jam.

In the blue corner TM declared it was acceptable to scrape the mould from the jam (immediately provoking an objection from the Food Standards Agency as to whether this was good hygiene) while in the red corner JC who is well known for his love of the preserve and has his own allotment appears to prefer his without the strawberries.

Meanwhile another (the 11th) meaningless vote went by last night (does anyone even notice anymore whether the votes are won, lost or amended?)  the EU and the Beeb are finally losing patience with ever more blood curdling warnings about how the country’s going to hell unless it comes to the table and agrees to the EU’s demands.

In its own inimitable way though as it has ever since Parliament locked Charles out nearly 400 years ago in 1642 since when no monarch has entered the House of Commons, parliamentary democracy is inching towards a deal.  It may not be pretty but as three times winning European Champions’ League winner Jose Mourinho might say it’s better to win “ugly” than to lose well.

Whether the two Brexit backing party leaders are willingly or otherwise running down the clock and forcing recalcitrant backbenchers to vote for the PM’s deal in the next fortnight our view is that Theresa May who’s an old hand will get this deal or some version of it through and in six months time people will be wondering what all the fuss was about.  (Y2k reprise)

In any event the FTSE’s voting with its feet and marching higher having charged through 7,000 in January is now through 7250 and up 10% from those dark December 6600 lows far behind.

We have believed since Christmas that UK assets are oversold and heavily undervalued…

Even in property UK real estate looked cheap at year-end despite all the warnings.  As the report below from Deloitte infers, the much derided “Northern Powerhouse” may not be so daft after all…there are now more cranes in Manchester than in Chicago, LA and Seattle combined, not bad for a city of just 500,000 people…

https://uk.investing.com/news/economic-indicators/construction-booming-in-regional-uk-cities–deloitte-1440368

And let’s face it, it’s looking none too good on the other side of La Manche with the French and Italians slinging mud at each other in time honoured fashion with La Republique’s ambassador to Rome being recalled for the first time since the second world war after Italy’s deputy PM Luigi di Maio was accused of consorting with les gilet jaunes in an effort to undermine the French government ahead of May’s European elections.  Not for nothing is “MAFIA” translated as “Morte Alla Francia Italia Anelia”  or “Death to the French” and just for good measure in Spain PM Sanchez has thrown another large rock into the pond by calling a snap election after his Catalonian coalition partners allyed with the conservative Popular Party (PP) to vote down his budget…I guess accusing your enemies of rebellion and sedition as the 12 Catalan secessionsists have gone on trial in Madrid this week is not the best way to win friends and influence people!

On the other side of the Atlantic meanwhile POTUS has succeeded in keeping the government going after a deal with Speaker Pelosi while his trade reps messrs Lighthizer and Mnuchin are in Beijing to meet Chinese vice premier Liu while in a positive move it was announced they would be joined by Xi Jinping himself to meet up with him…

Markets generally have been set alight since year end by the US Fed’s 180 degree U turn on monetary policy and the so called “QT” (quantitative tightening) being swiftly stopped in its tracks as the six rises in interest rates announced since 2017 look to be close to a peak.

Gold as a result has popped US$50 in 2019 to US$1320, (source Kitco)  bond yields are down and corporate bonds are through the roof with the global high yield market having its best start for a decade.

Stronger than expected corporate earnings and bullish outlook from companies as diverse as GM, LVMH and ROYAL DUTCH major m&a, BB&T buying SUNTRUST in a US$66bn deal and BRISTOL MYERS buying CELGENE for US$74bn. (source Bloomberg)

The biggest factor favouring the bulls is the ongoing disconnect between government risk free bonds and almost virtually anything else.  The market at end Dec got itself into on the wrong side whereby high yield bonds yielded 8% and with risk free money close to zero again outside the States it’s become increasingly expensive to bet against anything with a sustainable yield.

https://www.bloomberg.com/opinion/articles/2019-02-08/high-yield-bonds-are-partying-like-there-s-no-tomorrow

Meanwhile I spent an hour this week at a meeting in London with Marco Morelli, CEO of the world’s oldest bank Banca Monte dei Paschi (founded 1472) and number 3 in Italy by assets with €150bn after Intesa and Unicredit, as part of their London roadshow.

Morelli’s well connected into the Treasury in Rome and via them into the European Commission and ECB’s policy making committees which are overseeing the Commission’s state aid programme the 2016 decision to authorise the Italian Treasury to use state aid to support the Italian banks.

At 57 he also has the advantage of being quite young and dynamic for a CEO by Italian standards.

Key takeaways were:

  • 2018 probably marks the low point of the turnaround of the bank.  In terms of de-risking, NPE %(non-performing exposures) now stands at 16.4% gross NPE from 35.8% at end 2017 following this €30bn NPE downsizing.
  • Since 2012 Monte dei Paschi has significantly shrunk the balance sheet cutting loans by €55bn and deposits by €30bn. Total assets now stand at €155bn.
  • Morelli said commercial trends both in terms of loans and deposits are improving and it’s true that net interest margin (NIM) the key measure of profitability improved from 150bps to 190bps last year.
  • The company’s revised the business plan and nudged its forecasts down mainly due to a change of the poor Italian macro economic background, GDP now flatlining
  • The UTP (unlikely to pay) reduction in 2018 was €2.3bn (vs.€1.5bn at plan), for 2019 is expected at €2bn
  • Morelli warns about a potential NPE price change due to the macroeconomic scenario deterioration
  • Funding is not an issue in terms of 2019 maturities, while Monte Dei Paschi aims at taking advantage of any window to tap the bond market with a subordinated (€750m) Tier 2 issue this year but the window has been closed leading to speculation Draghi will restart the TLTRO programme used last year to benefit the eurozone banking industry.
  • The Italian Ministry of Economy and Finance (MEF), main shareholder at 68%, will probably look to dilute its stake either via a placing or merger
  • Morelli is working on a merger that as he says is probably the best option for the bank in order to exploit scale economies and funding benefits, which is true for most mid-sized Italian banks but will need central bank approval both in Rome and Frankfurt.

Conclusion:
Italian banks have underperformed equity benchmarks significantly.   With a price book in the sector of around 0.5x (source Bloomberg) there is potential value in the sector. If funding spreads drop as a result of the renewal of the ECB’s TLTRO programme on 07 March (currency markets starting to indicate this with EURO weakness) Italian banks’ share prices may stabilise.

 

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