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|