Investments in Italy: How investors are now getting involved with the boot

by Jörg Billina, Euro on Sunday

IItaly is the third largest economy in the EU and a member of the G-7 group of countries. The country is also indebted at 154 percent of gross domestic product. Who governs Italy, which economic and fiscal policy decisions are made, is therefore closely monitored in the other EU countries and the European Central Bank.

Investors are also aware of the importance of Italy. Violent political turbulence in Rome can not only depress the prices of Italian stocks. Corrections then threaten Europe-wide. Bond investors are also getting nervous. A stable government with economic reform zeal, on the other hand, attracts investors.

Money from Brussels

In the past twelve months, the stock exchange in Milan has increased by 25 percent. The FTSE MIB thus performed significantly better than the German DAX. Italian bonds are also in demand. Orders totaling EUR 55 billion were received for the recently issued government bond with a volume of EUR 7 billion, which runs until 2052. Investor confidence is largely due to Mario Draghi. The former head of the ECB has led a six-party alliance as prime minister since February last year. Under his direction, Italy has met the conditions to receive €191 billion from the EU recovery fund. The government wants to use the funds for urgently needed administrative reforms, for a more efficient tax system, for infrastructure reforms and for green projects.

Draghi’s serious political style, his goal of making Italy more competitive after a long phase of stagnation, strengthens entrepreneurs’ willingness to invest and creates jobs. Gross domestic product increased by six percent last year. Four percent are expected for the current year. The recovery motivated Britain’s The Economist to name Italy Country of the Year for 2021.

However, it is uncertain whether the success story will continue. Italy’s parliamentarians will elect a new president at the end of January. The 85-year-old former Prime Minister Silvio Berlusconi is running. It is not yet clear, but 74-year-old Draghi is also expected to compete. If he wins, a new prime minister will have to be found. Finance Minister Daniele Franco, among others, is given a chance.

But can a successor to Draghi hold the current coalition together until next year’s election date? Investors are concerned: the right-wing parties Lega, BrüderItaly and Berlusconi’s Forza Italia are aiming for early elections and are winning. Italy’s membership of the eurozone could then be called into question. According to Project Syndicate, economists Nouriel Roubini and Brunella Rosa warn that this would result in serious market distortions.

Title with potential

It can, but doesn’t have to, happen that way. The funds from the EU recovery fund are not paid out all at once, but only flow if previously agreed reform goals are actually achieved. Even a populist government can hardly afford to jeopardize the windfall from Brussels and to be responsible for a sharp rise in interest costs. Even if the political risks increase after the presidential election: Courageous investors use a possible price correction to make additional purchases. A number of Italian stocks continue to offer upside. For example, Goldman Sachs recommends buying the oil and gas company Eni. Ferrari, in turn, is Morgan Stanley’s top pick in the e-car maker industry. Zacks Equity Research, on the other hand, sees opportunities at Unicredit.

Investors can also get involved in a broad range of investments: the iShares FTSE MIB ETF includes 40 stocks. With an average price-earnings ratio of around 19, the stocks in the ETF are no longer cheap, but they are not too expensive either.

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