It’s been ten years since Lehman Brothers collapsed, plunging the global financial system into chaos. Regulators and legislators have taken steps to ensure that crisis won’t happen again. But, like the general who is always fighting the last war, legislation and regulation can’t address the next crisis.
That leaves investors and financial analysts always on the lookout for the next crisis. They have had several scares over the years with nearly endless crises in the euro zone and deep market plunges in China. Lesser known problems could also develop into unexpected problems.
While China grabs headlines, Europe could actually be the more likely epicenter of the next crisis. The original financial and economic crisis was much deeper than some investors may realize. In fact, Europe suffered two recessions in the past ten years.
Italy Is Back in the Spotlight
When Europe was in the grip of the second leg of the double dip recession, analysts developed an acronym to describe the problems. They called the most troubled countries the PIIGS for Portugal, Ireland, Italy, Greece and Spain.
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Now, it is Italy that is back in the danger zone on both the political and economic fronts.
After a recent election, Italy’s notoriously fickle politicians watched an unusual coalition emerge. The populist Five Star Movement (M5S) secured the largest chunk of the vote and soon sought to join forces with the far-right Lega (League) group.
The unusual nature of this coalition has been noted by other European politcians and not always in a positive way. According to the U. K. Telegraph,
“Europe is being taken over by populist leaders who resemble “little Mussolinis”, a senior EU figure said on Thursday, prompting fury from Italy.
Pierre Moscovici, European Economic Affairs Commissioner from France, likened the current political climate to the rise of Fascism and Nazism and said he was concerned about the rise of populist parties in the lead-up to European Parliament elections next year.
“There’s a climate very similar to that of the 1930s,” he told a press conference in Paris.
“Certainly we should not exaggerate, clearly there’s not Hitler, maybe little Mussolinis (instead).”
Italy’s coalition government reacted with anger to the remarks, with Luigi Di Maio, deputy prime minister, calling them totally unacceptable.
“The attitude from some European commissioners is unacceptable, really intolerable. “They dare to say that in Italy there are many little Mussolinis, and that should not be permitted,” Mr Di Maio, the head of the anti-establishment Five Star Movement, said.”
Unstable Politics Adds to Economic Concerns
“If you just look at the economic fundamentals of Italy, they are worrying,” Mouhammed Choukeir, chief investment officer at private bank Kleinwort Hambros, told CNBC’s “Squawk Box Europe” Tuesday.
“It is one of the biggest indebted countries in the world … it’s got an unemployment rate of 11 percent and its economy is still lower than where it was in 2007, whereas most major economies have recovered. So, clearly there is a requirement for structural reform here in order to regain confidence,” he added.
This economic weakness is easily seen in the Milan S&P / MIB Index, a benchmark stock market index for the country. The long term chart is shown below.
Italian stocks have never fully recovered to their pre-crisis highs and investors are now suffering through more than a decade of a bear market.
A Turnaround Is Possible According to Analysts
Now, however, there are hopeful signs according to analysts with Citi. As CNBC reported,
“A rise in populism for the embattled nation of Italy won’t be enough to unsettle investors this year, with analysts at Citi predicting markets in Milan to finish off 2018 on a strong note.”
Investors in the U. S. could consider investing in iShares MSCI Italy Index Fund (NYSE: EWI).
Highlighting two previous periods of weakness for Italian stocks, back in 2011 and 2014, Citi analysts said Tuesday: “We see it increasingly likely that history could repeat itself in (the fourth quarter of 2018).”
The main Italian index — the FTSE MIB — is down by almost 7 percent since the start of the year despite being a top pick for many investors back in January. Investors have taken a cautious approach following fears that the new populist government will increase public spending when the country is already mired in large amounts of public debt.
The government — a coalition between the leftist Five Star Movement and the right-wing Lega — is currently preparing its budget for 2019.
In the research note Tuesday, the analysts, including Citi’s Tina Fordham, said the Italian index had initially outperformed the European benchmark by 12 percent earlier this year and reached a new 10-year high “despite the lack of a clear election outcome” at the March vote.
“Then the worsening of the political situation caused a substantial correction that cancelled all the gains,” the bank said. Citi didn’t give a predicted figure for a year-end rally but noted previous turbulence in 2016 where the FTSEMIB fell 29 percent before rallying and closing the year up 27 percent.
According to Citi, Italy will announce a budget that will not have a deficit higher than 2 percent of gross domestic product. This would mean that Italy would not disrespect European rules and the reduction in government debt would continue, though at a slower pace. Italian stocks would likely benefit in such a scenario.
“Despite the political uncertainty and the recent export slowdown, the fundamentals remain positive,” the analysts said.
Citi’s analyst team, which is a research unit independent of the bank’s stock-picking side, said that it prefers Italian companies that generate most of their revenues outside of the country, given the slow GDP rate in the country.
The bank named Prysmian, Fineco, Moncler and Ferrari as some of its favorite picks. On the other hand, Telecom Italia, ERG and Mediaset are among the bank’s least-favorite stocks. But, we note that EWI could be the best choice for individual investors.
This report shows that investees should dig deep for investment ideas right now. It could be best to focus on companies that aren’t in the spotlight but that will require research, which can take an extended amount of time.
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