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, has recently notched some modest upside.
Give the largest Italy ETF some credit because the Eurozone’s third-largest economy faces an array of challenges and headwinds. 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.
Recent economic data indicate EWI has been moving higher amid a batch of concerning points about Italy’s economy.
“Gross domestic product was unchanged in the three months through June, Rome-based statistics agency Istat said in a preliminary report on Friday. That compares with the 0.2 percent median estimate in a Bloomberg survey of 25 analysts. The economy grew 0.7 percent from a year earlier,” according to Bloomberg.
Since the days of the Greek financial crisis, investors have frequently wondered which Eurozone shoe would be the next to drop. Italy has often been mentioned as that shoe and that sentiment has become widespread in recent months.
Italian banks’ bad loan problem has “become more pressing during years of economic stagnation. A highly fragmented and inefficient industry doesn’t help — Italy has more than 600 banks, supporting 52 bank branches for every 100,000 adults. Germany has 14 bank branches per 100,000 adults, and the United States 38,” according to CNN Money.
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.
In Italy, regulators are currently working to configure a bad debt company of sorts to help Italian banks deal with a rising non-performing loan problem. Earlier this year, Economy Minister Pier Carlo Padoan called a meeting in Rome with executives from Italy’s top financial institutions on Monday to hash out a plan for a state-backed fund to acquire bad loans and cover capital shortfalls, reports Silvia Aloisi for Reuters.
For more news and strategy on the Italy ETF market, visit our Italy category.
iShares MSCI Italy Capped ETF
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.