Italian equities: the rally may have further to run

Italian stocks are not often a bright spot in Europe. Indeed, the heavily-indebted economy’s flagship index, the FTSE MIB, has traditionally traded at a discount to peers. Yet over the past six months it has put in a turbocharged performance — and the rally may have further to run.

Italian equities certainly have some bounce this year. Italian stocks had taken a beating on the Ukraine crisis. At the end of last year, the index was trading at a 35 per cent discount to the MSCI Europe, compared to a historical 5 per cent according to analysis by Algebris, an asset manager.

Italy’s winning streak is largely down to its banks, which account for over a fifth of the index, and which have outperformed European peers by almost 20 percentage points. UniCredit leads the pack — its share price has doubled over the period. Smaller BPER and Banca Popolare Milano are up 80 and 70 per cent respectively.

Like many European banks, these have traded well below tangible book value for years. But Italian banks are more sensitive than most to interest rate hikes, with a high proportion of their loans on variable rates. They offer a leveraged play on any economic improvement.

Fears that a gas-price crunch might hobble the country’s manufacturing sector have proved exaggerated. In fact, the country’s sluggish economy may have actually picked up some steam. It grew by almost 4 per cent in 2022, according to the Bank of Italy, outperforming the rest of Europe.

There may be more to come. European post-pandemic funds — of which Mario Draghi’s government won a staggering €190bn (9 per cent of GDP) — are starting to flow through the economy. Also, a reopening of the Chinese economy should boost luxury and manufacturing companies, such as Moncler.

The Italian discount has narrowed this year but the market remains relatively cheap on 9 times forward earnings versus Europe on 13. Given that gap, Italian equities at least have a solid foundation to build upon.