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, is doing little to invite investors to challenge the bear thesis surrounding Italian stocks.
Arguably, EWI and Italy are inviting more bearish calls. 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.
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.
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.
“Italy’s banks are shouldering €360 billion in bad loans, of which €200 billion are categorized as insolvent. To make matters worse, nationalist fervor is building in Italy for a referendum on whether the country should bolt the European Union, in the manner of Britain’s self-destructive Brexit,” according to TheStreet.com.