Finance & Real Estate

2020-09-17 Andrea Beltratti, Alessia Bezzecchi

Economic Policy, Finance, and Real Estate

The factors that will allow the countries and businesses hit by the pandemic to go forward are the development of infrastructure, especially in the digital field, and greater capacity to analyze data. Economic policy takes on a crucial role in this period to coordinate businesses and consumers. The considerable public resources now available are the key to restarting a process of growth in our country as well

More than six months after the start of the pandemic, we can use market prices to understand the opinion of investors regarding the consequences of the health shock. This is a particularly important analysis, especially given the contrast between the data coming from the real economy and that from the financial markets. Drawing inspiration from the customary international benchmark to then derive implications for Italy, we note that the United States economy contracted by one-third in the second quarter of the year, and the Fed foresees a drop in GDP of 7 percent for 2020. At the same time, the S&P500 lost as much as 35 percent by mid-March, but today is higher than it was at the end of February. Is this the classic difference between retrospective analysis provided by GDP statistics and prospective analysis coming from the wisdom of the crowd that buys and sells financial products? Or are there other significant elements? Our interpretation is that the economic and market data is compatible and coherent with a period of structural transformation, a phase of “creative destruction” to use the term coined by Schumpeter. By now the business transformation is immersed in the society transformation, and to dominate that process of transformation the public role is essential to help finance itself be an infrastructure for change. Let’s see why.

Relative prices

The overall image provided by the US stock market must be considered more in detail. The recovery of share values is not uniform, but for the most part associated with the performance of technology stocks, and some technology stocks in particular. The performance of the S&P500 would in fact be quite different without the contribution of the Big Tech companies. For example, the capitalization of Apple is approximately 50 percent higher than at the end of February. Other sectors, such as listed small and medium-sized enterprises, have suffered much more from the fall in economic activity. Among the various sectors affected, Real Estate has seen significant losses. If we judge the consequences for this sector by looking at the stock market values of Real Estate Investment Trusts, we find that the main segments are still negative today. Those specialized in offices, residential, and healthcare have lost 20 percent since the end of February, while those dedicated to the retail sector are down 30 percent.

The graph below shows the performance of the various sectors, comparing the S&P500, Apple, and various REIT indexes.





Moreover, the construction sector does not seem to be facing difficulties from the standpoint of prices and activity: the Case-Shiller price index continued to rise until June, and the figure on permits for new homes in the month of July, equal to 1.495 million, is only slightly lower than the historic peak of 1.536 million in January of this year. The analysis of relative prices thus provides a picture consistent with a phase of great structural transformation: existing assets tend to depreciate in some cases due to short-term rigidity in category of use, and new activity moves towards new opportunities that reflect changes in demand from consumers and businesses. More than half a year after the start of the crisis, we can thus state that the new ways of living and working are creating new opportunities, not just criticalities.

What are the essential elements to face the challenge and transform it into an opportunity? In our view there are two essential elements, infrastructure and data processing capacity, that can allow companies to overcome this difficult moment.


The very concept of infrastructure has evolved rapidly. Until a short time ago, important infrastructure was represented by bridges, roads, airports, and railways, tools for the physical movement of goods and persons. The experience of recent months has however demonstrated the importance of communications networks for data transmission, and Italy's deficiencies in this field. Remote meetings often suffer from problems with viewing and listening that do not facilitate the migration towards smart working. The excess use of networks reduces their performance and requires great investments for expansion. At the same time, the upgrading of networks and the construction of data storage centers has become of crucial importance today. But the new needs for sustainable growth have implications for a new use of the stock of existing infrastructure. The new trends in urban mobility, based more on private than public transportation, risk causing significant harm to investments that have been made in recent years on urban transportation networks, and require even greater attention to the management of private traffic, that if left to its own devices, risks significantly increasing pollution levels. This leads to the need to help families renew the stock of motor vehicles to increase the share of modern and less polluting vehicles. A final note: rules and laws represent an essential infrastructure, able to ensure the peaceful and productive coexistence of various actors. In a context in which global value chains continue to become more flexible, it is necessary to considerably increase the flexibility of institutions. Businesses cannot be flexible if they live in a rigid system, which is why it is important for the public machinery to streamline and simplify the rules.

Data processing capacity

In recent years, attention has been concentrated on the role of data processing to understand customers' needs and for the creation of products and service able to attract their attention. Today there is recognition that data is important not only for private enterprise to improve the management of their operations, but also for society to better manage economic and social life. In particular, to link the discussion to the previous point, infrastructure can be used better thanks to data. Knowing the percentage of use of infrastructure allows for taking actions to improve its use to the benefit of the public. Having real-time data on infrastructure performance helps carry out “predictive maintenance” operations that can prevent catastrophes and ensure longer life for physical capital. The continuous increases of processing capacity by computers allows us to solve problems that seemed unsolvable until 20 years ago. One aspect is crucial, though: the ability to fully exploit the growing data processing potential is not only a technical question, but a cultural one as well. Students of every age and level must be able to understand what data is and why it is so important. Not understanding what data is and how it is transformed can make it difficult to think of creative and innovative solutions to face business and social problems.

The role of economic policy

In every phase of transformation, the role of the public sector can be crucial to not stop change, but to favor it, softening the impact on the most affected social categories and helping innovators grow, to fulfill their mission of combining existing resources in new ways. Italy is the best example of the importance of the public sector. Starting with a public debt to GDP ratio of 135 percent at the beginning of 2020, the country risks finding itself with a ratio of 160 percent at the end of the year, reaching the third spot in the global rankings of the most indebted countries with respect to annual productive capacity. Such a level has never been reached by our country, and is higher than the level associated with the Greek debt restructuring a decade ago. In its history, Italy has succeeded multiple times in reabsorbing high levels of debt, thanks to inflation and/or economic growth. To not fail future generations, and thus to reabsorb the debt through growth, an economic policy is needed that acts in service of a dream, that of definitely closing the gap that separates us from the best examples internationally. Thanks to its negotiating capacity, the government has obtained resources. Now it must prove it has a long-term vision, and spend the financial resources available in the best way possible. The public resources seem to be enormous, but they are not actually sufficient for a true plan of modernization of our country; the private sector must be involved in order to reach the critical mass necessary to restart growth. 


Andrea Beltratti is a Professor in the Department of Finance of the Bocconi University, where he teaches Economics of the Real Estate Market and Equity Portfolio Management, and Academic Director of the Executive Master in Finance (EMF) at the SDA Bocconi School of Management.

Alessia Bezzecchi is Associate Professor of Practice in Corporate Finance & Real Estate at the SDA Bocconi School of Management, where she is Program Director of the Executive Master in Finance (EMF) and of the Executive Program in Real Estate Finance and Real Estate (EPFIRE).