(Bloomberg) -- Italian shares have had a strong start to the year, outpacing European peers. Now comes the real test.
Even as Sunday’s vote revives worries about a strong showing by anti-establishment parties, Italy’s benchmark FTSE MIB equity index is closing in on a key resistance level dating back to its plunge during the global financial crisis of 2008-2009.
The good news is: Italian stocks are still the cheapest among the main European markets and their catch-up potential is colossal as the country’s economy continues to recover. Here are five charts that provide some insight on how the market is positioned going into the election.
After a 14-percent rally in 2017 and further brisk gains this year, technical charts show the FTSE MIB -- home of bellwethers such as Enel SpA, UniCredit SpA and Fiat Chrysler Automobiles NV -- is revisiting levels it has twice failed to breach, in 2009 and 2015: the 38.2 percent Fibonacci retracement of its plunge during the financial crisis.
For Valerie Gastaldy, technical strategist at Day By Day, this is a crucial test. “The index’s long-term trend will only turn positive should that level be passed,” she wrote in a note on Wednesday.
While a number of analysts are concerned that political risks aren’t properly priced into Italian stocks, upward momentum in the broad market appears intact. It may be that Italian equities are too attractively valued to ignore. Stocks traded at Milan’s Piazza Affari remain the cheapest among major European markets, with the FTSE MIB trading at about 12 times expected earnings in the next 12 months, while local banks remain priced well below their book value.
The positive performance of Italian stocks in recent months has mostly been driven by broad-based global growth, according to Nadege Dufosse, head of asset allocation at Candriam Investors Group. “Finally, the tide is floating the Italian economy too,” she said. “As the Italian equity market has been lagging over the past years, it is finally catching up.”
While indexes like Germany’s DAX and the FTSE 100 in London have recently hit record highs, the FTSE MIB still needs to double just to reach its peaks of 2007, leaving plenty of upside room for Italian shares amid a continued recovery in the economy. It has been steadily growing after the longest recession in post-war history.
“The Italian economy is enjoying a strong cyclical upturn, which is probably the dominant factor for market pricing, and, in addition to this, it tends to reduce voter dissatisfaction,” said Willem Verhagen, senior economist at NN Investment Partners. Still, reforms need to be stepped up as Italy’s main issue remains a low potential growth rate. “Structural reforms are the only hope.”
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