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Risks Abound for Italy ETFs

This article was originally published on ETFTrends.com.

Italy, the Eurozone's third-largest economy, entered a recession last year, but exchange traded funds, such as the iShares MSCI Italy Capped ETF (EWI) and the Franklin FTSE Italy ETF (FLIY) are trading higher this year.

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 anti-establishment 5 Star Movement may not survive the year, the Wall Street Journal reports.

While Italian stocks are performing well this year, some analysts and market observers believe Italy still has plenty of risks for investors to consider. Fitch Ratings recently tagged Italy with BBB sovereign credit rating with a negative outlook.

“Italy's 'BBB' rating and Negative Outlook reflect the extremely high level of general government debt and the absence of structural fiscal adjustment, relatively high net external debt, still-weak banking sector asset quality, very low trend GDP growth, policy risk and uncertainty arising from the current political dynamic, and associated downside risks to our public debt projections,” said the ratings agency.

Investigating Italy Markets

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.

However, sluggish GDP growth cannot be ignored.

“GDP growth has stalled as domestic policy uncertainty and weaker external demand has dragged down investment, while private consumption growth has also lost momentum,” said Fitch. “Fitch forecasts GDP growth of 0.3% in 2019, down from 0.8% in 2018 (compared with the 1.2% we forecast for both years at our previous review in August), with investment growth falling to 0.4% from 3.8% last year.”

Troubled 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. Political volatility could rear its head again I Italy this year.

“Policy tensions in the coalition government and the potential for early elections add to uncertainty over fiscal and economic policy,” according to Fitch. “The large ideological differences between the Five Star Movement and Lega are likely to put an increasing strain on the coalition, and we consider Lega would be minded to trigger a new election and return to the previous agreement on the right with Forza Italia and Brothers of Italy if it calculates they would win a majority of seats.”

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