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Italy Economic Prospects Improving

Renzi’s downfall has scuppered for now the sort of business and labor reforms that some economists say Italy needs to boost competitiveness
Italy is a big manufacturing country, and the global economy is recovering. Manufacturing  PMI in the past few months has been improving everywhere in the world.Italy is a big manufacturing country, and the global economy is recovering. Manufacturing  PMI in the past few months has been improving everywhere in the world.

Crisis? What crisis? The European market reaction to Italy’s landslide rejection of proposed constitutional reforms last week was remarkably sanguine, given that, from an investment viewpoint, the country’s referendum vote delivered the worst possible result.

It was a stinging rebuke to Prime Minister Matteo Renzi’s efforts to streamline the country’s lawmaking process, leading to his resignation and a period of political uncertainty at a delicate time for Italy, Barrons reported.

Renzi’s downfall has scuppered for now the sort of business and labor reforms that some economists say Italy needs to boost competitiveness. It also raises the specter of an early election and the possibility that the anti-European Union, anti-establishment Five Star Movement will expand its political influence.

Despite that, when markets opened the day after the Dec. 4 vote, the Stoxx Europe 600 index rose 0.6%. The euro—which had fallen 0.9%, to $1.056, as the referendum result unfolded—bounced back to around $1.073 over the following two days, before slipping again later in the week.

Oddest of all has been the market impact on Italy’s banks, some of which were already buckling under a hefty burden of nonperforming loans. Italian lenders account for about half of all the bad loans held by listed eurozone banks. Two of the country’s biggest, UniCredit ) and Banca Monte dei Paschi di Siena, are trying to raise new capital. The “no” vote has made that task harder by possibly deterring would-be investors.

The day after the referendum Monte Paschi stock plunged 4.2%, but by Thursday it was almost 12% higher than on the last trading day before the Italian vote. It fell back again on Friday following news that the European Central Bank had denied the bank’s request for more time to raise the capital it needs, shedding 10% on the day to leave it only 0.3% higher on the week. UniCredit initially dropped 3.4% after the vote but was up just under 20% on the week. Investors expect the government will now have to pump taxpayer cash into at least one of the banks.

Marco Pirondini, executive vice president and head of equities, US, at Pioneer Investments, says Italian banks have underperformed for most of the past eight years.

“They’re very, very cheap,” he says. “In many cases, they trade more like options than investments. They seem to be up and down 10% every other day. There are a lot of risks that honestly are very difficult to analyze, but a lot of that is in the price. For more adventurous investors, there could be some opportunities here.”

Banks Need Capital

Pirondini points out that Italian banks are mainly in need of capital to meet more-stringent regulations. “It’s because they are being pushed to become safer, not because they are about to go bust,” he says. “In many cases, they have more capital than in the past 20 years, even after taking account of the nonperforming loans, so this is not a distressed situation.”

Pirondini adds that although the calm market reaction to the referendum was largely because pollsters had accurately predicted the outcome, it is also attributable to the country’s improving economic prospects.

“Italy is a big manufacturing country, and the global economy is recovering. Manufacturing  purchasing managers index in the past few months has been improving everywhere in the world, as are other leading indicators,” he says. Apart from boosting the country’s economy, such growth will go some way to lifting the credit quality at Italian banks.

Above all, the referendum hasn’t made Italy’s situation any more complicated. “We don’t have a new constitution, but we’ve been working with the old one for more than 50 years,” Pirondini says. “For Italy, it’s more of the same. We were hoping for a change, but it isn’t traumatic.”

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