As investors worry about the fiscal prospects in one of Europe’s most indebted nations, Italian stocks are selling at their lowest discount to global shares in 35 years. However, some believe the shares are too cheap to ignore.
Although historically less expensive than their worldwide counterparts, Italian stocks now have a discount of 50%, the largest since 1988, and have remained there for a few months. Compared to the average gap observed over the previous 20 years, this is twice as large.
Indeed, the rally in Milan’s blue-chip index this year has been mostly attributed to banking stocks, which have profited from the highest increase in interest rates in the euro area on record.
Domestically oriented businesses in industries, like consumers and manufacturing have suffered due to an aging population, debt that exceeds 100% of GDP, and two decades of almost nonexistent economic growth that were only momentarily broken by the post-COVID recovery.
Due to this, Italian stocks are now generally more affordable than even battered UK shares, which are currently selling 33% less than their worldwide counterparts.
Because of concerns about Italy’s fiscal prospects, Chris Hiorns, head of multi-asset and European equities at EdenTree, stated that “it is not particularly an area I want to be exposed to” in the Italian stock market.
Concern over possible sovereign stress has been rekindled by recent reductions in economic growth and increases in budget deficit projections. As a result, investors’ desire to keep 10-year Italian bonds rather than safer German ones exceeded 200 basis points (bps) last month.
Although it has shrunk, the disparity is still there. When Fitch evaluates Italy’s BBB credit rating and stable outlook on Friday, there will be a test.
“A change in the outlook cannot be ruled out, given lower growth, higher interest rate expenses, and the deterioration in Italy’s fiscal position,” a note from Barclays stated.
According to Goldman Sachs, the FTSE MIB index loses 1.5% and Italian bank shares lose almost 2% for every 10-basis-point increase in sovereign spreads. After outperforming the blue-chip index, it suggests staying away from it.
Italy’s challenges in fulfilling the requirements set forth by the European Commission in exchange for billions of euros in post-pandemic recovery money are exacerbating the country’s funding demands.
Meanwhile, unrest in the Middle East and Ukraine has the potential to depress GDP and lead to another spike in energy costs.
BlackRock’s iShares MSCI Italy ETF had 18.9 million outstanding units in October 2021; that figure has more than halved to 8.6 million units. Over the same time frame, the number of units in its MSCI Europe ETF has decreased by less than 10%.
MATERIAL QUANTITIES
Although investors anticipated some clawback given how severely discounted certain segments of the market are, a large re-rating of shares is unlikely anytime soon given Italy’s bad economic prospects and heavy debt.
Following a nearly 30% decline last year, the FTSE Italia Star index, which tracks companies with a market valuation of up to 1 billion euros ($1.07 billion), is down 10% so far in 2023. In contrast, this year has seen a 5% decline in the FTSE mid-cap index.
The termination of a government-sponsored program to encourage investment in small-sized local equities has caused outflows from smaller Italian stocks, according to Giuseppe Sersale, strategist and portfolio manager at Anthilia in Milan.
“Trading on absurd multiples is practiced by several companies. It’s worthwhile to take advantage of the value window that is opening up for small caps, he stated.
