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Italy ETFs Have Been Outperforming

This article was originally published on ETFTrends.com.

Italian stocks and country-specific ETFs have been outperforming in the Eurozone region despite the ongoing uncertainty around the Southern European country and its troubled banking sector.

Over the past three months, the iShares MSCI Italy Capped ETF (EWI) increased 6.3% and Franklin FTSE Italy ETF (FLIY) advanced 5.9%, whereas the benchmark MSCI Europe Index added 2.7%.

Italy's economy dipped into a recession in the fourth quarter of 2018, and political volatility may persist as analysts argued that the governing coalition of the anti-immigration League party and the antiestablishment 5 Star Movement may not survive the year, the Wall Street Journal reports.

Nevertheless, the benchmark FTSE MIB stock index is among the best performers in Europe, jumping 11% so far this year.

Demand for newly issued Italian government bonds have also far exceeded supply, reflecting the renewed risk-on appetite and growing appeal for the country’s higher interest rates, which are near records relative to benchmark German rates.

“We don’t like Italy because of the amount of debt they have, their ability to pay that debt, but they offer a yield you can’t get anywhere else,” Paul Brain, head of fixed income at Newton Investment Management, the BNY Mellon subsidiary, told the WSJ. “A whole pension industry and insurance industry in Europe is trying to put their money somewhere.”

Italian markets took a hit last year after the new populist government butted heads with Brussels, enacting budget-deficit plans that broke the European Union’s rules on fiscal discipline. Investor concerns, though, eased somewhat after Rome, the Eurozone’s biggest government borrower, helped avoid the bloc’s disciplinary proceedings.

The renewed interest for Italian assets has helped support the country's beleaguered banking sector, which is struggling with bad loans. Furthermore, Italian bank stocks have been supported by analysts' expectations that the European Central Bank will extend its Targeted Longer-Term Refinancing Operations, which provides cheap loans to banks, a large portion of which has gone to Italian lenders.

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