Going Bullish Italian Equities

We are initiating a bullish Italian equities view, played through the Milano Italia Borsa (FTSE MIB) equity Index, at an entry level of 21,345. This is based on a constructive technical picture, positive political developments and low relative valuations that we believe can drive the index to outperform regional equity indices in the coming months.

With a price-to-book ratio of 1.1x, valuations on the FTSE MIB remain well below periphery and core eurozone peers, and this is justified given Italy's low growth outlook and lack of reform. However, the urgent reform agenda and broad popular support of Prime Minister Matteo Renzi has increased the chances that structural impediments to stronger corporate profit growth will begin to be addressed.

Improving sentiment towards Italy, and the eurozone periphery more generally, is evidenced by plummeting sovereign bond yields. A bullish technical break of long-term resistance for the FTSE MIB supports our view that sentiment towards Italian equities has also reached a turning point.

Bullish Technical Signals
Italy - FTSE MIB Equity Index, Weekly

We are initiating a bullish Italian equities view, played through the Milano Italia Borsa (FTSE MIB) equity Index, at an entry level of 21,345. This is based on a constructive technical picture, positive political developments and low relative valuations that we believe can drive the index to outperform regional equity indices in the coming months.

Bullish Technical Signals
Italy - FTSE MIB Equity Index, Weekly

With a price-to-book ratio of 1.1x, valuations on the FTSE MIB remain well below periphery and core eurozone peers, and this is justified given Italy's low growth outlook and lack of reform. However, the urgent reform agenda and broad popular support of Prime Minister Matteo Renzi has increased the chances that structural impediments to stronger corporate profit growth will begin to be addressed.

Improving sentiment towards Italy, and the eurozone periphery more generally, is evidenced by plummeting sovereign bond yields. A bullish technical break of long-term resistance for the FTSE MIB supports our view that sentiment towards Italian equities has also reached a turning point.

Still A Way Off Pre-Crisis Levels
Italy - FTSE MIB Equity Index, Monthly

Some form of additional easing from the European Central Bank (ECB), made more likely in light of Spain falling into deflation in March, would be broadly supportive of investor sentiment and eurozone equities, decreasing risk aversion and boosting the attractiveness of the FTSE MIB. This would also provide a boost for Italian banks, which are a significant reason for low aggregate valuations on the index. While Italy's fragmented banking sector faces many challenges, we believe the worst has passed for Italy's largest lenders UniCredit and Intesa SanPaolo, which hold a large weighting on the index.

BMI Europe Asset Class Strategy
DATE INITIATED ENTRY LEVEL GAIN/(LOSS) RATIONALE
CURRENCIES
Bullish RUB/TRY 18-Mar-2014 16.4 -0.7% Turkey offers a more attractive long-term investment story and positive carry, while lower oil prices will expose Russia's massive economic challenges.
FIXED INCOME
NA
EQUITY INDICES
Eurozone Over US Equities (Ratio of MSCI US to MSCI EMU) 15-Aug-2013 17.3 1.6% Though we still like the US, eurozone underperformance has reached extremes, and the eurozone economy is picking up momentum. The MSCI EMU looks attractive on a technical basis and is increasingly cheap versus the US. Targeting a move down in the US/EMU ratio to 14.0x.
Bullish Italian FTSE MIB Index 28-Mar-2014 21,345.5 - Constructive technicals, positive political developments and low relative valuations.
MACRO/INDUSTRY STRATEGY
NA
Source: BMI, Bloomberg

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