Equities Set To Outperform

With the Milano Italia Borsa index (FTSEMIB) still trading at a discount to book value and a bullish technical picture signalling the potential for strong gains, we believe Italian equities offer an attractive risk/reward profile. In our view, the approaching expulsion of centre-right leader Silvio Berlusconi from the Italian Senate, as well as the emergence of an influential moderate faction of his People of Freedom (PDL) party, bodes well for government stability and policy trajectory. As such, sentiment towards Italy could continue to improve, which combined with accelerating regional growth and the potential for new liquidity measures from the European Central Bank (ECB) could drive momentum behind further equity gains.

Among major Western European equity markets, Italy saw not only the steepest declines following the global credit crunch in 2008 and subsequent eurozone debt crisis, but the most tepid recovery since. This is hardly surprising given Italy's unstable governance and lacklustre reform efforts since the crisis, which in our view have done little to address a massive public debt load or boost the country's long-term growth potential. In contrast, Spain's reform drive has won a vote of confidence from Germany, whose pledge to offer bilateral financing to small and medium sized firms in the country has bolstered investor sentiment.

If a cohesive and stable coalition were to emerge from the most recent political crisis, we believe Italy could see a similar boost from a renewed commitment to a substantial reform programme. While we caution that the political landscape remains largely uncertain, and strong obstacles to reform will remain in place, we nevertheless believe sentiment has bottomed out, and that relatively attractive valuations amidst improving investor sentiment and growth across the region will continue to make Italian equities more appealing.

Poised For Takeoff?
Italy - Milano Italia Borsa Index

With the Milano Italia Borsa index (FTSEMIB) still trading at a discount to book value and a bullish technical picture signalling the potential for strong gains, we believe Italian equities offer an attractive risk/reward profile. In our view, the approaching expulsion of centre-right leader Silvio Berlusconi from the Italian Senate, as well as the emergence of an influential moderate faction of his People of Freedom (PDL) party, bodes well for government stability and policy trajectory. As such, sentiment towards Italy could continue to improve, which combined with accelerating regional growth and the potential for new liquidity measures from the European Central Bank (ECB) could drive momentum behind further equity gains.

Poised For Takeoff?
Italy - Milano Italia Borsa Index

Among major Western European equity markets, Italy saw not only the steepest declines following the global credit crunch in 2008 and subsequent eurozone debt crisis, but the most tepid recovery since. This is hardly surprising given Italy's unstable governance and lacklustre reform efforts since the crisis, which in our view have done little to address a massive public debt load or boost the country's long-term growth potential. In contrast, Spain's reform drive has won a vote of confidence from Germany, whose pledge to offer bilateral financing to small and medium sized firms in the country has bolstered investor sentiment.

Behind The Pack
Europe - Regional Equity Indices, Rebased To May 2007=100

If a cohesive and stable coalition were to emerge from the most recent political crisis, we believe Italy could see a similar boost from a renewed commitment to a substantial reform programme. While we caution that the political landscape remains largely uncertain, and strong obstacles to reform will remain in place, we nevertheless believe sentiment has bottomed out, and that relatively attractive valuations amidst improving investor sentiment and growth across the region will continue to make Italian equities more appealing.

Investors still have reason to be wary of exposure to the Italian banking sector. However, while on aggregate the sector remains broadly weakened, the country's largest lenders have made important strides in stabilising their balance sheets. Unicredit and Intesa SanPaolo, which represent two of the top five listed firms on the FTSEMIB by market capitalisation, both continue to trade at a deep discount to book value despite greatly reduced tail risks. With the ECB potentially beginning a new long-term refinancing operation, this would further improve the stability of the sector and bolster the case for Italian equities.

Worst Is Over For Banks
Italy - UniCredit & Intesa SanPaolo Share Price (LHS) & Price-To-Book Ratio (RHS)

Our bullish eurozone financials equity strategy highlights our view that valuations have fallen too far given a vastly improved risk profile. More generally, our asset class strategy reflects our broad based bullish sentiment towards eurozone equities, and includes significant exposure already to Italian stocks. As such, we would not initiate a bullish FTSEMIB view, despite our belief that the index is poised for strong growth.

Read the full article

This article is tagged to:
Geography: Italy
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.