The iShares MSCI Italy Capped ETF (NYSEArca: EWI) traded slightly lower Monday, a day after the country’s elections resulted in a hung parliament. Adding to the concern for Italian financial markets was voters’ preference for far-right, populist parties that are skeptical of the euro.
While Monday’s action in EWI extended a multi-day losing streak for the largest Italy exchange traded fund listed in the U.S., EWI bounced back Tuesday. Still, some analysts and market observers believe risks linger for Italian assets following the election.
“Sunday’s vote has resulted in a hung parliament, with no existing political bloc able to form a majority,” said Fitch Ratings in a note out Tuesday. “Populist parties increased their share of the vote at the expense of more centrist parties. Among individual parties, the anti-establishment, eurosceptic Five Star Movement (M5S) won the largest share of the vote (32.2%), while the right wing Lega (17.7%) outperformed its main partner in the election campaign, the centre-right Forza Italia (13.9%). The ruling centre-left Democratic Party’s share of the vote dropped to 18.9%.”
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. The Italian government has been under pressure to calm concerns over its ailing banking system. Financial services is by far the largest sector weight in EWI.
Market observers project earnings per share growth for European stocks to remain strong and build upon the success over the first two quarters of the year. In the first half of the year, earnings upgrades were broad and far reaching instead of concentrated to specific areas. Since October 2016, trailing 12-month EPS of European stocks are up to double digits, and since July of last year, 12-month forward EPS expectations are up by a similar amount as well due to a strengthening global economy.
Italy’s “election comes against a backdrop of a moderate cyclical improvement in GDP growth, which rose to 1.5% in 2017 from 0.9% in 2016. This supported a reduction in the general government deficit, to 1.9% of GDP from 2.5%,” according to Fitch. “Very high public debt, a track record of fiscal slippage, low trend GDP growth and political risk are weaknesses in Italy’s sovereign rating, which we affirmed in October, alongside relatively high net external debt and banking sector weakness.”
For more information on Italy, visit our Italy category.
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.