Italian Renaissance: Italy ETF Soars

August 9th at 8:00am by Tom Lydon

Italy, one of the “I’s” in the now infamous PIIGS acronym, has been at the epicenter of the Eurozone sovereign debt crisis. While the country never quite sank to the dark depths of Greece or Spain, it seemed as though Italy was always mentioned as the “next shoe to drop” in the Eurozone.

Inefficient government, a fractious political situation, reluctance to embrace austerity and a recession-mired economy have been among the dark clouds that have hung over the iShares MSCI Italy ETF (NYSEArca: EWI) in recent years, but those clouds are passing and investors are embracing Italian stocks once again. [Spain, Italy ETFs Under Pressure]

Italy, one of the more politically volatile developed nations in the world, seems to be settled by its political standards with a new coalition government led by Premier Enrico Letta. Letta is reform-minded and has made bold promises “to turn around the economy in 18 months by reforming electoral law, suspending a property tax, cutting ministers’ salaries and urging European leaders to reverse austerity measures,” reports Trang Ho for Investor’s Business Daily.

EWI, the lone Italy ETF, is still saddled with a year-to-date loss, but the fund is well on its way to erasing that black mark. EWI has surged 13.2% in the past month, buoyed by political stability and the belief by Italy bulls that the Eurozone’s third-largest economy will finally start recovering in 2014. A one-month gain of 13.2% may imply that EWI and Italian stocks are no longer value plays, but that is not the case. [Overseas ETF With Good Value]

Earlier this year, valuations in the Italian stock market are lower than any other European nation, indicating significant room for growth. Australian asset manager AMP Capital is buying Italian stocks amid signs of economic recovery and valuations that are below those of global benchmarks, reports Adam Haigh for Bloomberg.

EWI currently sports a price-to-book ratio of 1.35, well below that of comparable France, Germany and Spain ETFs. However, EWI is far from a risk-free bet. Nothing in peripheral Europe is. Although Italy’s manufacturing sentiment index and business confidence recently showed impressive increases, the country’s unemployment rate is 12% and youth unemployment is a startling 39%.

The Bank of Italy recently said this: “In the first four months of the year we saw a more marked decline in loans to households. The tightening of lending conditions to households for house purchase stopped, by reflecting less unfavorable prospects for the real estate market.”

Comments like those highlight the need for caution with an ETF that devotes over a 30% of its weight to the financial services sector, as EWI does. Still, EWI may offer tremendous upside for patient investors as the ETF would need to rise another two and a half times to reach its pre-financial crisis peak.

iShares MSCI Italy ETF

ETF Trends editorial team contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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