After a stalemate that left Italy without a clear government mandate for the better part of the last two months, a new government is now in place, and it looks more pro-growth than pro-austerity.
Italian equities are rising, and the bond market in particular seems to be welcoming Italy’s new leadership, with some of the lowest yields in recent years. In an interview with IndexUniverse.com’s Cinthia Murphy, Cumberland Advisors’ Chief Global Economist Bill Witherell says it looks like a propitious time to take another look at investing in Italy.
IU.com:Italy has a new government, and you say it’s going to be considerably better for the country and the economy than people were expecting. Why do you think that?
Bill Witherell :The party that came out on top of the split election was a group to the far left, and we didn’t know which way the country was going to go if that group really came to power, but they couldn’t form a government and they are now in the opposition. What we have for government is a broad coalition to the center-left led by Enrico Letta that is not going to unwind the good things that were done in the past or do anything radical to harm the economy.
Their new economy minister, Fabrizio Saccomanni, comes from the central bank and is highly respected both in Italy and abroad. But that’s not to say that things will improve overnight—chances are the recovery will still be a long haul. Italy has had pretty unstable governments and has managed to move ahead despite its government.
IU.com:This new government is going to be pro-growth rather than pro-austerity. Why is that a better prospect for Italian recovery?
Witherell: Because I think the European Union has overdone it on the austerity side, trying to correct the deficit problem too rapidly, which really just prolonged the recession they are in. The Europeans just came out with projections for economic growth that were essentially a broad downgrade in outlooks—France now expects another year of recession, and overall the eurozone should be in recession for another year.
Recovery is not going to really happen until 2014 because the cuts were too aggressive on the budget side. European countries need to reduce austerity efforts; they don’t need higher taxes right now. And trying to get banks to lend to businesses remains one of the big problems there.
IU.com:If they are not going to focus on austerity, why have yields on Italian bonds come down and stabilized? Their debt outlook hasn’t gotten any better.
Witherell: I don’t think their debt outlook has gotten any better, except that if they get growth going, that’s going to help them on the debt side. What has happened is that people are less concerned about some disaster happening or the euro breaking up.
No one is looking for more cases of countries getting into debt situations that require a bailout. Investors now think Europe is going to muddle through. They are not going to reduce debt rapidly, but it’s not going to get too much worse.
IU.com:It’s an attitude shift, then, that’s supporting the bond market?
Witherell: Yes, they see less risk in the outlook. It’s increased confidence in the whole system and in the euro. It’s not that the amount of debt to GDP has improved; in fact, the latest economic indicators still point to a recession that has now persisted for eight quarters. But there’s hope that the new Italian government will be able to make progress in economic reform.
IU.com:On the equities side, is this the time for U.S. investors to jump into Italian equities again? You’ve said they should outperform other markets. Is this a valuation play?
Witherell: It’s largely a valuation play at this point because they were driven down far too much by the split election results earlier this year. Italian equities got very cheap, near multiyear lows. We’ve already had an outperformance in the last month relative to German and French equities.
The question remains, Is that it in terms of outperformance or will it continue? I’m not positive on that, but I think there’s still some more room for outperformance here respective to other European markets—of course, not compared to the U.S. and Japan.
IU.com:Are you recommending that investors buy Italy? Should they do it through ETFs?
Witherell: We only use ETFs in our business, and I do think for an American investor it’s a much easier way to invest in Italy. The broadest fund out there is the iShares MSCI Italy Capped Index Fund (EWI), and it’s a good ETF to use according to all the analysis out there.
EWI in April saw almost three times the gains of its Germany counterpart, the iShares MSCI Germany Index Fund (EWG). Certainly, to pick individual equities is probably too difficult a task, and it doesn’t give investors a diversified way to invest in Italy, which makes a lot of sense to me.
If you look at last year, Italy was not a good place to invest in with its recession being so severe. But the European equities markets have held up pretty well despite it all, and Italy is one of the more dynamic markets in Europe despite all its problems on the government side.
Many of its banks are stronger than other banks across Europe, and the financial sector is key here. Italy’s private sector is also carrying little debt. These are all positives for Italy.
IU.com:Are you concerned at all with high unemployment rates? Could that derail this growth you’re looking for?
Witherell: It’s an indication that the Italian economy is still in recession. High unemployment affects consumer consumption, in particular, and it’s a reality shared by most of Europe right now.
It’s also one of the main reasons why the governments are all now saying they want to put more emphasis on growth. High unemployment is bad for the country and it’s bad politically. It’s certainly a concern, and one of the major problems in Italy, and in Europe right now.
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