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.
Related: Rome Extends Italy Banks, ETFs a Helping Hand
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.
Related: 10 ETFs Hit the Hardest in ‘Brexit’ Fallout
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.
“Prime Minister Matteo Renzi’s beleaguered government is projecting GDP growth of just 1.6% this year for Italy, but the Organization for Economic Cooperation and Development is less sanguine,” reports TheStreet. “The OECD forecasts that Italy will generate 2016 growth of about 1% this year, 9% below the level Italy reached in 2008 immediately before the global financial crisis.”
For more news and strategy on the Italy ETF market, visit our Italy category.