Over the past several years, investors have endured Grexit speculation, or talk about Greece departing the Eurozone. More recently, there was Brexit whereby Great Britain opted to leave the European Union. Not surprisingly, Brexit stirred talk about other countries that could be candidates to leave the EU or Eurozone.
Italy is a frequently given answer to those questions. Such chatter could pressure the iShares MSCI Italy Capped ETF (NYSEArca: EWI), which is already one of this year’s worst-performing developed markets single-country exchange traded funds.
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Italy’s fragile banking sector, the largest sector allocation in EWI, is in focus as global market participants fret about Brexit’s impact on Italy’s banks. The Italian government has been under pressure to calm concerns over its ailing banking system, which underperformed in the European Central Bank’s 2014 financial stress test and is holding €360 billion, or $410.5 billion, in bad loans.
“The prospect that Italy could be on the way out of the Euro within a year or two is far from fanciful. After all, Italy’s economic performance within the Euro has been nothing short of dismal. Eight years after the 2008-2009 Great Economic Recession, the Italian economy is still some 6 percent below its pre-2008 peak and its unemployment rate remains stuck at above 11 percent. Equally concerning is the International Monetary Fund’s projection that a sclerotic Italian economy will only regain its 2008 output level in 2025,” according to The Fiscal Times.
[related_stories]While Italy’s economy is stagnating, making matters worse is the fact that some agencies do not expect that trend to reverse course anytime soon.
“The Bank of Italy and the International Monetary Fund have both revised down their economic outlook, predicting growth of less than 1 percent this year. Political uncertainty ahead of a referendum that’s threatening to topple the government, and banks’ high share of non-performing loans, are weighing on domestic demand, while trade is damped by clouding global prospects and a looming recession in the U.K. following its Brexit vote,” according to Bloomberg.
Last year, reforms to Italy’s banking sector were seen as a potential driver of improved equity market performance. Specifically, the reforms would turn these types of banks into possible takeover targets almost instantly. For instance, the new rules could be a catalyst for a potential merger between UBI Banca and Banca Monte dei Paschi di Siena.
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“A prolonged period of political uncertainty is the last thing that a sclerotic Italian economy now needs. Its banking system is burdened with non-performing loans that amount to around 18 percent of its outstanding loans, and its public sector debt has risen to 135 percent of GDP,” reports The Fiscal Times.
For more news and strategy on the Italy ETF market, visit our Italy category.
iShares MSCI Italy Capped ETF
