When the market overreacts
By Simon Angelo
A common view against active investing is the Efficient Market Hypothesis. It suggests that the market has already absorbed all information concerning a stock and thus it is priced efficiently and correctly. However, as Warren Buffet pointed out, the Efficient Market Hypothesis only works sometimes!
Markets mirror the human frailties that underlie them, especially when it comes to fear and greed. Perhaps the most irrational fear is fear of loss. Studies have shown that the strength of emotion behind fearing losing what we have is much greater than the joy or anticipation of gaining something more. It's called Loss Aversion. And it's this sort of thinking that holds back 99% of people from taking the risks needed to flourish, especially financially.
Let me share a secret
As a share buyer, some of my best trades have taken advantage of market overreaction, especially when the market fears loss. When the Brexit vote in the UK succeeded in 2016, we took the opportunity to buy some quality companies at oversold prices. The month after, we were up 7.50% - in a single month.
This happened again a few weeks ago with an Italian business we've been watching for some time - IGD (Immobiliare Grande Distribuzione), the largest owner of shopping malls and hypermarkets in Italy and Romania. As a significant, listed player in the Italian retail market, the stock price is aligned to the fortunes and expectations for the Italian economy. There have long been concerns with the economy in Italy, not least with public debt levels, and as a result IGD has been cheap - with book value per share currently at around 60% of asset value.
Most recently there was the announcement that the Minister of Labour, Luigi Di Maio plans on banning Sunday trading to defend family traditions in Italy. This dragged down IGD's price further to bargain territory as it generated fear.
Looking at the situation more closely, 25% of stores would still be able to open on Sundays on a rotating basis under the proposed law. Sunday bans in other places simply spread shopping revenue onto other days - particularly relevant in the case of IGD properties which are often anchored with a supermarket or hypermarket such Ipercoop (whom is also a significant shareholder via their parent company).
The fear settled and the market started to recognize IGD had probably been oversold. We had already purchased for account holders, so notched up a 6% gain the week after, not to mention the 7%+ pa dividend yield enjoyed via the holding.
Long term view
The controversial new Italian government may further help IGD's stock price. The populist government - formed by leftist Five Star Movement and the right wing Lega have promised among other things, drastic cuts to corporate tax rates, slashing red tape and guaranteeing all Italians a minimum monthly income of up to 780 euros. This may not find favor with the EU, already concerned with a free spending Italy - but it'll be great for the malls.
What about debt in Italy?
Fitch, the ratings agency recently cut Italy's credit outlook to negative but maintained the long term rating at BBB. Government debt is the highest in the Euro area after Greece, running at 130% of GDP. However the finance minister has reiterated an intention to bring this down.
This is not as worrying as it might be however when you consider other factors in relation to the Italian retail sector. Household debt in Italy is actually relatively low at around 41% of GDP - beneath that of Germany, France and the UK. Ironically an increase in interest rates benefits Italian households as they have a higher savings ratio. In terms of IGD, their debt level is stable with a loan-to-value ratio of around 46% and average cost of debt at only 2.7%.
Of course, there remains the wider view that malls will continue to be battered by online shopping. However retail footfall seems to continue to grow, albeit not at the rate of online. My own view is that people get tired of staring at screens and want to get out, especially to cafes and supermarkets, which are prevalent in IGD malls. When I visited their Mondovicino mall in Piedmont last year, it was thriving.