World Economy

Western European Traders Brace for More Turmoil

Western European Traders Brace for More TurmoilWestern European Traders Brace for More Turmoil

While most western European markets have recovered from the Brexit shock, Italy still has a long way to go. With a looming referendum and an ongoing banking crisis, traders are paying up to hedge against more stock turbulence.

Investors in the Mediterranean nation, already suffering the world’s biggest losses this year, are bracing for a vote on political reform expected in November that could decide the fate of Prime Minister Matteo Renzi. They have pushed the price of options protecting against volatility in Italian equities for the next three months to the highest since 2013 versus shorter-term contracts, according to data compiled by Bloomberg.

Citigroup Inc. has branded the plebiscite the largest risk in European politics this year outside the UK. Italian banks are also suffering as they scramble to shore up capital in the face of €360 billion ($406 billion) of bad debt. For Kevin Lilley, a manager of eurozone equities at Old Mutual Global Investors in London, the danger is so high he cut his Italian holdings to just one company—defense firm Leonardo-Finmeccanica SpA—after selling shares including Banca Popolare di Milano Scarl and Mediobanca SpA.

Last year, when a China-led selloff erased as much as $8.3 trillion from global equities, Italy bucked the trend. The benchmark FTSE MIB Index reached a near six-year high in July 2015, and surged an annual 13%, as an overhaul of employment laws and expectations of a domestic economic revival buoyed investor confidence.

This year, the equity benchmark has slid down the rankings, and one of the biggest exchange-traded funds tracking the market is heading for a seventh month of outflows in eight.

  Loss-Making Italian Banks

Italy’s banks are leading losses among European stocks amid concern over their levels of bad debt. Banca Monte dei Paschi di Siena SpA, which fared the worst among 51 of its peers subjected to recent European stress tests, has plummeted 80% in 2016 as its plan to offload billions in doubtful loans and increase capital failed to win over investors.

Unione di Banche Italiane SpA, which has fallen 62% this year, earlier this month reported a second-quarter loss on higher bad-loan provisions and restructuring costs.

Italian growth unexpectedly stalled in the second quarter, missing forecasts for a 0.2% expansion. The Bank of Italy and the International Monetary Fund have both lowered their projections for the year, predicting an expansion of less than 1%.

But, after a slide of 22% this year for the FTSE MIB, Jasper Lawler, a London-based analyst at CMC Markets Plc, said that some investors may see an upside: valuations on Italian stocks have fallen to about 13 times their estimated earnings, near the cheapest in four years versus the Stoxx Europe 600 Index.