The iShares MSCI Italy Capped ETF (NYSEArca: EWI) is up 5.4% year-to-date, an admirable showing considering the volatility often associated with the Eurozone’s third-largest economy.
Italy is still struggling with issues within its banking sector, an important consideration with EWI because financial services is the largest sector allocation in the largest Italy exchange traded fund.
Political uncertainty continues to linger in Italy as well. Former Prime Minister Matteo Renzi resigned in December following a no-confidence referendum. At the time, some market observers believed Renzi’s resignation could lead to early elections and a rise in support for the populist anti-euro Five Star Movement. The party would seek to carry out a referendum on Italy breaking away from the Euro area.
“Requests for precautionary recapitalisation by two mid-sized Italian banks highlight the persistence of pressures in the sector, Fitch Ratings says. The impact on Italy’s sovereign rating will depend on the fiscal costs of bank support and whether it is accompanied by measures that successfully address the underlying weakness in the banking system,” said Fitch Ratings in a recent note.
Italian banking stocks have also been improving since the December 5 low after Prime Minister Matteo Renzi announced he would resign following the referendum defeat on December 4, which also fueled heavy short covering and further bolstered prices.
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.
“In December 2016, the Italian government set up a Treasury-funded EUR20 billion (1.2% of GDP) fund earmarked for precautionary recapitalisation needs. Government-backed recapitalisations through the fund are conditional on the banks presenting restructuring plans. MPS was the first bank to request that the fund intervene via precautionary recapitalisation. The European Commission is still examining its request and there is not yet clarity on the exact burden for creditors or the amount of capital to come from the state,” said Fitch.
Alternatives to EWI include the the iShares Currency Hedged MSCI Italy ETF (NYSEArca: HEWI) and Deutsche X-trackers MSCI Italy Hedged Equity ETF (NYSEArca: DBIT), both of which are currency hedged ETFs.
For more information on Italy, visit our Italy category.