Thanks to Banks, Italy Stocks Reverse Peer-Beating 2015 Gain

  • Monte Paschi lost 56 percent in 2016, trades near record low
  • Uncertainty over bad loans, ECB scrutiny is worrying investors

Italian stock bulls who hung in there after the FTSE MIB Index’s stellar run in 2015 are now feeling the sting.

The country’s benchmark gauge has suffered a whiplash-inducing reversal, going from one of the best to the absolute worst among developed markets in a little over a month. The biggest problem is the lenders, which represent almost a quarter of the index: worries about bad loans and European Central Bank scrutiny have sent Banca Monte dei Paschi di Siena SpA and Unione di Banche Italiane SpA down more than 40 percent this year.

“We’ll have a hard time putting money in Italian banks stocks,” said Romain Pasche, EFG Bank’s head of investment in Geneva, citing concern over the results of the ECB’s review. “Uncertainty is never good, and there’s still some in Italy.”

The 18 percent slump in the FTSE MIB this year is a rude awakening for investors who piled in in 2015. Back then, optimism for Prime Minister Matteo Renzi’s measures, including an overhaul of the labor code, and ECB stimulus sent the Italian index up 13 percent -- almost double the gains in the Stoxx Europe 600 Index.

But economic data in the region started to miss estimates in January, compounding warning signs about global growth. Italy’s gross domestic product is forecast to expand 1.3 percent this year, less than the euro area. And even after an agreement was reached last week on a plan to ease the burden of bad loans, banks tumbled further.

The ECB is investigating non-performing loans to tackle bad debt across the region, and a task force will propose follow-up action. In Italy, banks’ bad loans reached a high of 201 billion euros ($223 billion) in November, with record-low interest rates helping squeeze profit margins.

The market slump has made stocks attractive, says Samantha Melchiorri, a fund manager at Milan-based Symphonia Sgr SpA, who’s looking to gradually buy more. At 12.4 times estimated earnings, FTSE MIB members are trading at a one-year low, 12 percent below peers in the Stoxx 600.

“Very often, massive selloffs create good opportunities,” Melchiorri said from Milan. “We had a disaster month. The market seems to be oversold, as it’s already pricing in all the negative issues.”

JPMorgan Chase & Co. sees the FTSE MIB rebounding 23 percent to 21,500 by the end of the year, according to a Feb. 1 note. That’s in line with strategist projections for the region.

Still, the cost of FTSE MIB options has been surging, and is now at its highest level since May 2014 relative to shares in the euro area. Monte dei Paschi, one of the region’s biggest losers, has been trading at a level that technical analysts call oversold -- yet investors aren’t ready to buy.

“Whenever you have an ECB investigation, even if it’s a normal process, everyone gets nervous,” said Konstantin Giantiroglou, head of investment advisory and research at Neue Aargauer Bank in Brugg, Switzerland. “At the end, people don’t know how the process is going to look and the bad banks may need extra capital. This uncertainty needs to end.”

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