Morningstar - Q2 2020 - 31

Dispatches

force in 2019. The Financial Conduct Authority says
that if there is "material uncertainty" over the
pricing of at least 20% of a fund's assets, the fund
must suspend trading.
Ryan Hughes, head of active portfolios at AJ
Bell, says that it was inevitable that more funds
would have to suspend trading. "This is done
to protect existing investors and stop investors
who wish to sell redeeming at an artificially
high price," he says. "So, while this will be hugely
disconcerting for investors who are trapped
in these funds, it's important to remember the
underlying reasons for asset managers
making this move."
Willis Owen's Adrian Lowcock says the coronavirus
crisis is just the latest in a long list of events,
including Brexit and the financial crisis, to
highlight the sector's liquidity shortcomings.
"Property funds are no longer functioning well in
a world that wants daily dealing," he says.
Jonathan Miller, director of manager research
at Morningstar, agrees: "It feels like Groundhog
Day. Whenever we see high levels of
uncertainty, volatility, and market sell-offs, this
comes around again."
Holly Black is a senior editor with Morningstar U.K.
James Gard is a content editor with Morningstar U.K.

COVID-19 Tests Italian
Resilience
G R E AT E R E U R O P E

Italy

As of March 12, DBRS Morningstar continued to
view Italy-rated BBB (high), Stable Trend-
as having a degree of resilience to short-term
economic shocks.
As recorded coronavirus cases and deaths rise
sharply, Italian authorities have implemented
restrictive measures, placing the entire country on

lockdown. The main measures so far include
the closures of schools, museums, universities,
sports centers, bars, restaurants, and all
commercial outlets except food stores, pharmacies,
and financial- and insurance-services outlets.
Public transportation remains active, although
subject to potential restrictions, but citizens
are encouraged to stay at home and otherwise
must sign a self-declaration of work- or healthcarerelated need.
These measures might become even more
restrictive, as preliminary evidence has shown
some positive signs from areas where the
lockdown measures have been harsher. Such
measures may subsequently help limit
otherwise sizable economic and fiscal costs.
The Italian government's crisis response
measures to support the economy at this point
include a fiscal package of up to EUR 25
billion, representing 1.4% of GDP.
"The potential positive carryover effect of a deficit of
1.6% of GDP in 2019, the lowest since 2007,
is a fortunate starting point, even if the expected
recession, higher fiscal spending, and the
deactivation of the VAT safeguard clauses might
push the total fiscal deficit above 3% of GDP,"
says Carlo Capuano, vice president of global
sovereign ratings with DBRS Morningstar and the
lead analyst on Italy.
For some time, DBRS Morningstar has viewed
weak GDP growth as Italy's Achilles' heel
and a key constraint on lowering the very high
public debt burden that limits its flexibility
in times of crisis.
A short-term shock of moderate depth most likely
will be manageable and should be followed
by an economic rebound and a restated
commitment to fiscal consolidation. However, the
emergence of signals that suggest a deeper
and more prolonged slump could have negative
rating implications. Pivotal in the assessment
will be the success of disease containment and
the speed of economic recovery-the fiscal
costs of supporting the economy, the impact of
crisis mitigation measures on Italian banks,
and the effectiveness of European institutions'
crisis measures.

Italy's tourism and transportation sectors are under
severe strain, with very high cancellation
rates throughout the country. The tourism sector
directly accounts for around 5% of Italian GDP
and indirectly a lot more. Its negative contribution
to economic growth will likely extend for
a prolonged period.
DBRS Morningstar also views the manufacturing
sector as a risk to the economic outlook
if production is severely affected by domestic
measures. Lower foreign demand also poses
risks to manufacturing output, as the virus
is spreading sharply in other trading partners, such
as Germany. Manufacturing accounts for
around 17% of gross value added, and it makes a
sizable contribution to Italy's export capacity.
Last year, Italy's total export of goods was about
EUR 460 billion, representing 26% of GDP.

"Although the domestic situation will likely test
the resilience of Italian firms," Capuano says,
"the country is the second-largest manufacturing
economy in Europe, and it is highly integrated in
European value chains. The speed of Italy's
recovery will depend also on the effectiveness
of the EU and global response."
DBRS Morningstar global sovereign ratings group report.

Healthcare Sector
Should Hold Up
AU S T R A L I A + N E W ZE A L A N D

Australia

The healthcare sector in Australia usually is
reliably defensive. However, this is not a typical
economic cycle. The COVID-19 crisis affects
the operations of these companies directly. We
expect varied outcomes across the sector over the
shorter term, depending on the nature of the
product or service. Should the COVID-19 pandemic
trigger a more sustained economic downturn,
however, we expect most of our coverage in
the sector to be resilient over the longer term once
the epicenter shifts away from healthcare.

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