Italy Rally May Prove Hard to Repeat as Election Looms
(Bloomberg) -- After leading the charge in 2017, Italian stocks might have a harder time staying ahead of European peers next year even as the bull run continues.
Milan’s benchmark FTSE MIB index, up 17 percent since Dec. 31, is poised to close 2017 as the best-performing major market in Europe and is on course for its best annual performance since 2013. That compares with gains of 15 percent and 14 percent this year for Germany’s DAX and The Netherlands’ AEX gauges, respectively.
“We’re looking at the European equity market with favor,” Luca Trabattoni, country head for Italy and Mediterranean countries at Union Bancaire Privée, said in an interview. “The sky is apparently clear even though there may be some clouds on the horizon.” With general elections looming, one of those clouds could be Italy, he said.
Europe’s fourth-biggest economy risks political gridlock after the election, which must take place by late May, keeping prospects for economic reform weak, Fitch Ratings said in a report on Nov. 29. Concerns that stricter rules from the European Central Bank will hit Italian lenders, which are still struggling under piles of soured debt, have weighed on the shares of Italian financial companies in the last quarter of the year, a trend that may persist until more clarity on the measures emerges.
Italian stocks fell on Wednesday after a fresh round of speculation about general elections to be held on March 4 appeared in the domestic media, stoking concern about political turbulence.
“In Europe, Italy remains the Damocles sword,” said Christophe Bernard, chief strategist at Vontobel Asset Management. Former Prime Minister Matteo Renzi’s Democratic Party is losing ground in the polls and a victory of the anti-establishment Five Star Movement “could reawaken fears about the future of the euro zone, given that in Italy euro-skepticism is still looming,” Bernard said.
Some brokerages, including Natixis SA, see opportunities in “a temporary surge” in political risk in Europe. None of the main political risks going into 2018, including Italy’s elections and Britain’s departure from the European Union, will “undermine visibility and thus trigger a switch to risk-off mode,” Natixis strategists said in a Dec. 11 note.
The FTSE MIB started the year from a low base, emerging from 2016 as the worst-performing market among large European exchanges and closing down 10 percent that year. Progress in stabilizing the banking sector, better-than-expected economic growth and the introduction of PIR investment plans that benefit from tax breaks restored investors’ appetite for Italian assets, fueling this year’s rally.
Credit Suisse Group AG analysts cited the “reasonably cheap” valuation of Italian stocks in a Nov. 28 report in which they upgraded Italian equities to benchmark. Political risk higher than elsewhere in Europe prevented the brokerage from turning more positive, it said.
Credit Suisse analysts also mentioned the need for structural reforms, the stubbornly high stock of non-performing loans at Italian banks, and a disproportionately negative impact from the end of quantitative easing by the ECB as additional burdens.
UniCredit SpA and Banca IMI are even more bullish. The former estimates the FTSE MIB index could climb as high as 25,500 in the first six months and end 2018 at 24,500, according to a Nov. 16 note. Banca IMI forecasts the gauge will rise 13 percent next year, according to a note published Wednesday.
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