The iShares MSCI Italy Capped ETF (NYSEArca: EWI) climbed again Wednesday and the largest Italy ETF has been seeing increased ahead of a key referendum vote in the Eurozone’s third-largest economy.
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.
iShares MSCI Italy Capped ETF
Recent bullishness in EWI “represents a reversal in sentiment; year-to-date flows remain negative, with $397.1 million leaving the fund, and it is down more than 20% thus far in 2016. Italian stocks have been particular pressured by the country’s banking industry this year, which has suffered due to its high levels of bad loans,” reports MarketWatch.
Most polls suggested the Italian referendum, which is supported by Prime Minister Matteo Renzi, will likely be voted down. Renzi initially pledged to resign if the results don’t go his way, potentially leading to a caretaker government that could focus on reforming Italy’s electoral law, Richard Turnill, Global Investment Strategist for BlackRock, said in a note.
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.
“In Sunday’s referendum, voters will decide on whether to approve changes to the country’s constitution. However, the vote is largely being viewed as a vote of confidence in Prime Minister Matteo Renzi. If the “no” side wins, there is a possibility that he will resign and the government will be dissolved,” according to MarketWatch.
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