Italy’s stocks rally but the market remains (very) cheap
LONDON (Reuters) -Italian stocks continue to trade at a deep discount to global peers, even after surging this year, reflecting nagging concerns about fiscal credibility and weak long-term growth prospects.
Italian shares are up around 40% so far this year, their highest level since 2008, reflecting strong gains by banks and defense firms and improved sentiment towards Europe.
The market is not as cheap as it was, trading at a discount of roughly 34% compared to global stocks. It touched its widest discount in 35 years of around 50% in 2023, LSEG data and Reuters calculations show.
But it’s far from levels seen during the 2020 COVID crisis when the discount was just 13%. In contrast, shares in France, where the government is close to collapse, offer a 19% discount to global peers.
"Italian assets are too cheap because people are still concerned about structural imbalances in the Italian economy and the lack of structural reforms," said Emmanuel Cau, head of European equity strategy at Barclays.
The message from Italian equity investors contrasts with a more upbeat view from bond markets, where the premium investors demand to hold Italian 10-year bonds over top-rated Germany has fallen to its lowest since 2010. It’s trading below 100 basis points (bps), having briefly spiked over 300 bps in 2020.
Political stability under Prime Minister Giorgia Meloni and efforts to bring down Italy’s lofty debt-to-GDP levels have helped narrow bond spreads.
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Milan’s blue-chip FTSE Mib reflects some of this positive sentiment, with a 23% surge so far this year that has outpaced the broader European index’s 8% gain.
UniCredit, Italy’s second biggest bank, has surged over 70%, defense firm Leonardo has jumped 90%.
ARRIVEDERCI GROWTH
Dig deeper and the read out from equity investors is more bearish than it first appears.
The FTSE Italia Star index, which includes many domestic-focused companies, is up a more modest 6.8% this year.
And two decades of near-zero economic growth and debt at still more than 130% of gross domestic product have left Italian equities at the same level of battered UK shares, which are trading at 36% discount to global peers.
On a more upbeat view, the Italian equity team at asset manager Algebris Investments said they expect the recovery in industrial earnings to extend into 2026.
U.S. investment bank Goldman Sachs said Italy will get support from the European post-pandemic recovery fund until 2026 and political stability should continue, but the economy needs improvements.
Italy’s government in April halved its 2025 growth forecast to 0.6% and lowered its 2026 forecast to 0.8% from 1.1%.
And while Italy is close to bring its budget shortfall close to the European Union’s 3% cap next year, expecting to keep it at 3.3% of national output in 2025, debt as share of economic growth is projected to remain stable at around 135% in 2025.
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Earlier this year, S&P Global upgraded Italy’s rating, citing its falling budget deficit, resilient exports, high domestic savings rate and confidence that the European Central Bank will contain inflation.
"If we look a bit ahead, the (Italian) growth picture doesn’t look as compelling," she added.
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