Macro & Markets Guide: Italy

Stéphane Renevier, CFA

4 mins

Macro & Markets Guide: Italy
  • Italy's economy has been a real trooper, showing more strength than most economists expected. It's not just growing at a fair clip, but also flashing encouraging signs of stability in the face of a less-than-sparkly global economic forecast.

  • But it’s not all sunshine and rainbows: headline and core inflation are still at eyebrow-raising levels, and with the ECB keeping its hiking boots on, the recovery could be a rather delicate affair.

  • As long as the European economy is on the upswing, Italy should be in good shape. But if it takes a bigger-than-expected dip, Italy could find itself in a bit of a pickle. After all, Italy's motor is its manufacturing sector, and it needs its neighbors to keep buying its exports.

  • The FTSE MIB has outperformed the S&P 500 this year, with the outperformance largely coming from utilities, consumer discretionary and financials sectors.

  • The FTSE MIB is cheaper than the S&P 500 and has a higher dividend yield. However, its companies are more indebted and less profitable. That makes them more exposed to a more significant slowdown in growth

Italy's economy has been a real trooper, showing more strength than most economists expected. It's not just growing at a fair clip, but also flashing encouraging signs of stability in the face of a less-than-sparkly global economic forecast.

But it’s not all sunshine and rainbows: headline and core inflation are still at eyebrow-raising levels, and with the ECB keeping its hiking boots on, the recovery could be a rather delicate affair.

As long as the European economy is on the upswing, Italy should be in good shape. But if it takes a bigger-than-expected dip, Italy could find itself in a bit of a pickle. After all, Italy's motor is its manufacturing sector, and it needs its neighbors to keep buying its exports.

The FTSE MIB has outperformed the S&P 500 this year, with the outperformance largely coming from utilities, consumer discretionary and financials sectors.

The FTSE MIB is cheaper than the S&P 500 and has a higher dividend yield. However, its companies are more indebted and less profitable. That makes them more exposed to a more significant slowdown in growth

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Country Overview

Italy is the third-biggest national economy in the eurozone and the eighth-biggest in the world, with an annual size of about $2 trillion. The country has a diverse economy, which is broadly split into a developed industrial north dominated by private companies, and a less-developed, agricultural south.

Italy's main trading partners are predominantly within the European Union, notably Germany, France, and Spain. Beyond the EU, the US and China are also key trading partners. The country's most important exports include machinery, clothing, vehicles, and food and drink.

The main driver of Italy's economy is its manufacturing sector, particularly the production of luxury goods by small, often family-owned, companies. The country’s also well-known for its autos, industrial, fashion, and food industries. And tourism and agriculture are important too. After all, Italy is one of the world's leading producers of wine, olive oil, and fruit.

Economic Update

Economic growth has been more robust than feared.

At a time when investors’ main worry has been a recession, Italy's economy is putting on quite a show. Economists expecting just 0.2% economic growth in the first quarter of the year double-took as Italy’s economy grew by 0.5%, a robust turnaround from a slight dip the previous quarter. Compared to the same time last year, Italy’s economy was almost 2% bigger, setting the stage for a potential annual growth rate of 0.8% in 2023. Looking ahead, leading indicators signal that a rebound in growth is possible, a view shared by most economists, who reckon Italy’s growth could accelerate at a faster pace than initially anticipated.

Economic growth has been more robust than feared.
Economic growth has been more robust than feared.

Inflation is on the decline, but still too high for comfort.

When it comes to inflation, it's not all gelato and prosecco, but things seem to be heading in a brighter direction. With headline inflation in May clocking in at 7.6% higher than a year ago, we're far from its sky-high 11.2% peak. That being said, it's still hotter than investors would like. Core inflation, which strips out volatile stuff like food and energy prices, is holding steady at 5.2%. Looking down the road, the investors are betting on inflation cooling down below 2% by the end of the year, which seems pretty optimistic given they’re also expecting robust economic growth.

Inflation is on the decline, but still too high for comfort.
Inflation is on the decline, but still too high for comfort.

Interest rates are uncomfortably high, but there are no major alarm bells ringing.

With eurozone interest rates set by the European Central Bank (ECB), Italian government bond yields are the best way for investors to assess the country’s local interest rates. The 10-year government bond yield has been hovering above 4% since late last year, but the 3-month yield is still climbing and is now above 3%, largely thanks to the ECB’s ongoing rate hikes. Essentially, investors have their sights set on higher Italian interest rates than, say, three months ago. The gap between the yield offered by long-term bonds compared to short-term ones – the yield curve – meanwhile, has “flattened”, suggesting bond investors anticipate both growth and inflation to fall, but not far enough to sound the alarm for a recession.

Interest rates are uncomfortably high, but there are no major alarm bells ringing.
Interest rates are uncomfortably high, but there are no major alarm bells ringing.

Stock Market Overview

The FTSE MIB is the key Italian stock market index. It’s largely an “old economy” index mostly exposed to financials, consumer discretionaries and utilities.

The FTSE MIB consists of the 40 biggest and most liquid stocks listed in Italy. It’s pretty concentrated, with the largest firms representing 70% of the total index.

Its top ten holdings include utilities firm Eni, consumer discretionary companies Ferrari and Moncler, and financial giant UniCredit.

In terms of sectors, it is most exposed to financials, consumer discretionary, and utilities. Relative to the US’s S&P 500, the FTSE MIB holds a lot more consumer discretionary, financials, and utilities stocks and fewer healthcare and tech companies.

A concentrated “old economy” index mostly exposed to financials, consumer discretionaries and utilities.
A concentrated “old economy” index mostly exposed to financials, consumer discretionaries and utilities.

Stock Market Update

Fundamentals suggest Italian shares are cheap and high-yielding, but more leveraged than US stocks.

The FTSE MIB boasts an attractive dividend yield of 4.8%, almost double that of the S&P 500.

It’s currently trading at attractive valuation multiples, with a price-to-earnings (P/E) of 9, a price-to-cash-flows (P/CF) of 5.7, and a price-to-book (P/B) of 1.22.

Italian companies have a lot more debt, however, and while the return on common equity is decent, it’s lower than that of US companies.

Italian shares are cheap and high-yielding, but more leveraged than US stocks.
Italian shares are cheap and high-yielding, but more leveraged than US stocks.

Stock market performance has been strong since October last year.

The FTSE MIB has outperformed the S&P 500 over the past year. This year, it’s up 17% while the S&P 500 is only up 5.7%. UniCredit, Ferrari, and Enel have been driving most of the gains.

Stock market performance has been strong since October last year.
Stock market performance has been strong since October last year.
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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