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Posted on 03 Jul 2017 by Gareth Brown

Italy: Crowded Out

Italy: Crowded Out


Italy has been a wonderful hunting ground for the Forager International Shares Fund since inception in 2013, especially among smaller companies where we most often find an edge. The country has many world-class businesses and they have been cheap, until recently.

Over the past 6 months, though, stock prices are up dramatically. That’s been good for our existing portfolio but it’s terrible news on balance. Today’s bargains make tomorrow’s returns.

Foie gras finance, such as the ECB’s €60bn a month of quantitative easing in Europe, is surely playing a part. But we suspect it’s a change to tax and investment laws that is doing the most to price us out.

Tax incentive

At the start of 2017, a new law allowed Italian fund managers to establish individual savings plans called individuali di risparmio (PIRs). Big tax savings await individuals invested in such funds who hold for five years or more. Specifically, zero income tax and zero capital gains tax. Individuals can invest €30,000 a year, up to an aggregate of €150,000.

Italy is a high tax country. And its residents love a tax loophole even more than Australians. This measure might be enough to get the populace over its historical aversion to sharemarket investing. Assets within the PIR also avoid inheritance tax, another bugbear of Italians.

To comply, PIRs must have at least 70% of assets invested domestically, in Italian company equity or debt. Furthermore, Italian small and mid-capitalisation equity and debt must comprise at least 21% of total fund assets. It’s that last rule that hurts us most.

Flows into PIRs in recent months have swamped the initial estimates made by the Ministero dell’Economia (Ministry of Economy), which will surprise nobody but the Ministero dell’Economia. Updated forecasts now suggest inflows over the next five years into smaller and mid cap stocks alone might top €10bn. Even that might prove conservative as asset managers rush to set up PIR-compliant funds. Considering the free float in that part of the market is less than €50bn today, the potential for distortion is significant.

There are still opportunities to buy cyclical Italian businesses at very attractive prices and two of our newer investments are in the country. But the days of paying less than 10 times earnings for high quality growth stocks look to be behind us.

Italy: Crowded Out
Italy: Crowded Out  Italy: Crowded Out  Italy: Crowded Out  Italy: Crowded Out

6 thoughts on “Italy: Crowded Out

  1. Hi Gareth. Interesting! Looks like a super scheme that you dont have to waith 30 years to access. What proportion of the international fund is currently invested in Europe and where is your next European hunting ground?

    • We’re about 27% Europe (ex UK), 15-18% in each of the UK and US, and the rest in Rest of World and cash. Bear in mind we own a lot of companies that sell globally and that shifts the picture somewhat. We’re looking all over Europe, as always. I don’t expect anytime soon to find a single vein as rich as Italy has proven for us 2013-16, but we’ll shift focus to wherever the next crisis pops up and hopefully find some interesting opportunities while we wait for that.

  2. In my eyes, a large cap, that still looks undervalued, is Telecom Italia. But many other stocks in Italia have already performed very well. Maybe Be might be worth looking at. Maybe it’s too keen to ask, but do you have an opinion on both of them?

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