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Italy’s Crisis Catches Up With EWI

Cinthia Murphy


The iShares MSCI Italy Capped Index Fund (EWI), the market’s only Italian equities-focused fund, has bled more than 5 percent of its value on the heels of an Italian election earlier this week that failed to result in a clear government mandate.

That slide has added to losses for investors, who have now seen the $527 million fund slip nearly 9 percent since the beginning of the year.

Italy is a country “beset by deep economic and political crisis,” as geopolitical intelligence firm Stratfor said in a note this week. Indeed, the latest election failed to elect a head, and instead betrayed a deeply divided population with a larger-than-expected segment willing to follow an anti-establishment movement led by Beppe Grillo, known as the “Five Star Movement.”

“The complex political and economic climate in Italy explains Grillo’s success,” Stratfor analysts said in their note. “For the past 14 months, the technocratic government of Prime Minister Mario Monti implemented spending cuts and tax increases, following the dictates of the European Union with the support of Italy’s main political forces.”

“Although these reforms succeeded in temporarily reducing pressure from the international markets on Italy, they did little to improve the quality of life for most Italians,” Stratfor added.

Indeed, Italy is facing its worst recession in 20 years, and its austerity measures have pushed unemployment—particularly among the youth—to new highs now above 11 percent. Some economists estimate that as many as one in three youths is out of a job in Italy, and many are looking to emigrate.

“This gap between the policies promoted by the mainstream parties and the desires of the population worsened in recent weeks,” Stratfor noted, pointing to corruption scandals among mainstream politicians, a fact that has contributed to a growing disconnect between the people and its elected officials.

“Like Greece, Italy is approaching a situation where popular discontent is threatening the country’s governability,” Stratfor said. “The situation in Italy is not as severe as in Greece, but the Hellenic nation reminds one just how quickly the social and political situation of Eurozone members can degrade.”



What’s An Investor To Do?

It seems that despite the troubled outlook, many U.S. investors continue to bet on exposure to Italian equities. Indeed, more than $5 million of new net assets has found its way into EWI this past week, though the fund slipped 5 percent.

In all, net inflows into EWI have now exceeded $210 million since Jan. 1, as shares of the fund bled more than 9 percent of its value, according to data compiled by IndexUniverse.

It could be that investors are looking at attractive valuations in Italy as a reason to buy into funds like EWI.

“Valuation is the only thing Italy has going for it right now—it’s currently at a discount to the world, and at a discount to Europe,” Dave Garff, head of Walnut Creek, Calif.-based Accuvest Global Advisors, told IndexUniverse.

The problem is, Garff says, that from where he sits, valuation is not enough reason to buy Italy.

“From an investment standpoint, we look for countries that have a combination of four things:strong and/or accelerating fundamentals; above-average momentum; low risk; and attractive valuations,” Garff said. “When we look at it, in those terms, there’s not a lot going on in Italy that’s exciting.”

On a fundamental basis, the country’s leading indicators like earnings and sales growth are all in a poor trend relative to its peers. In fact, in Accuvest’s 28-country model, Italy came in 24 th in the past month in terms of fundamental health.

Italy’s momentum isn’t measuring up either. In fact, Italy was the worst-performing country in Accuvest’s model in the past month, hurting its momentum score, which is still deteriorating, says Garth.

Meanwhile, risk is increasing. Volatility in Italy is going up and credit default swap rates are among the highest in the space, Garff says.

“Italians want change, but change from what?” Garff said. “They want change from austerity in Europe. They want change from having to take their medicine.”

“Italy doesn’t want to suffer the consequences and pain of austerity,” he added. “In a broader sense, I’m growing concerned about anti-austerity sentiment in Europe.”

For the time being, Garff noted, investors have only two ways to express their views on Italy:by avoiding the country entirely; or by shorting exposure to Italian equities.


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