Italy’s Stocks Go From Laggards to Winners, Leaving Spain Behind

(Bloomberg) -- In this year’s race between two peripheral European stock markets, Italy has left Spain in the dust mostly thanks to Mario Draghi’s reforms. Fund managers and strategists see the gap between the two bourses widening further in 2022.

After trailing the Stoxx Europe 600 during last year’s recovery rally, Italy’s FTSE MIB Index has surged 20% in 2021, while Spain’s IBEX 35 benchmark has barely risen. Even more impressive is the performance of the country’s small companies: the FTSE Italia Small Cap Index has jumped 48% this year. 

Political stability, good economic growth and attractive valuations have powered Italian shares, with Draghi’s ascension to prime minister in February reassuring investors. By contrast, Spanish equities have been hurt by their high exposure to the tourism sector -- which is struggling to recover from the pandemic -- and to the ailing utility sector.

Draghi has given Italy “a unique political stability and credibility,” said Alberto Tocchio, a portfolio manager at Kairos Partners. “Italy is our top pick within Europe.”

Earlier this month, Fitch Ratings raised Italy’s credit rating, the country’s first upgrade in four years, in a sign of confidence in Draghi’s policies that helped the economy grow faster than the European average.

“Historically, politics has been a huge detractor for Italian equities but the current government seems to be steady,” said Fabio Caldato, a partner at Olympia Wealth Management, who favors Eni SpA and UniCredit SpA among Italian stocks. The market’s strong exposure to the financial sector as well as value companies could also help fuel Milan’s outperformance next year, he said.

To be sure, Italy is set to face a political test when President Sergio Mattarella’s seven-year term expires in January. Analysts have long suggested that reappointing Mattarella was the smoothest path of assuring the continuation of Draghi’s government, but Mattarella has recently signaled that he’s not up for a second term. Draghi is seen as a top candidate to replace him. His early departure from the government could interrupt a reform process that’s key to lowering debt and reversing years of economic stagnation.

But even after this year’s strong gains, valuations are still on Italy’s side. With a forward price-to-earnings ratio of about 11, the FTSE MIB still trades at a discount of about 26% to the Stoxx 600. The earnings momentum has been strong since the latest earnings season, according to Barclays Plc strategists. 

By contrast, Spain has been underperforming during the recovery and it’s “unlikely to reverse course soon owing to feeble household consumption, a troubled construction sector and a slow tourism recovery,” the strategists said in a recent note.

The Spanish market has suffered from a less favorable sectoral mix than its Italian counterpart, said Stefano Girola, a portfolio manager at Alicanto Capital SGR. “The Italian index has benefited from the presence of strong industrial assets and a China-exposed luxury industry, which are both absent in Spain,” he said, citing Ferrari NV and CNH Industrial NV as examples.

The IBEX has been hurt by its strong exposure to tourism through International Consolidated Airlines Group SA and airport operator Aena SA, among its worst performers this year. Poor returns from utilities, which have a 22% weighting in the benchmark, were also a drag, hit by the government’s intervention to soften the impact of a power crunch.

For Spanish stocks to catch up, the country would have to see economic growth “greater than in the rest of Europe” to boost its banks and service industry, especially tourism, said Ricardo Seixas, a fund manager at Bestinver Gestion. 

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