Italy stock market rallies amid tamer inflation

It took the Italian stock market some time to shake off the bad rep they have acquired during the past few years to the point that they are now being frequently overlooked by investors outside of Italy. We would argue, wrongly so. Milan’s FTSE MIB index has travelled a long way from the 2020 low of just below 16,000 to today’s 34,271.

Over the last 12 months the index gained a respectable 26%, and since the start of the year just over 12%. Looking at the macro data, the country has managed to achieve a very delicate feat of a soft landing as its economy improves faster than the rest of the eurozone while inflation remains contained at around 1.2%

In a report this spring the OECD praised the country for weathering recent crises well. “A strong fiscal policy response, enhanced competitiveness and improved banking sector health have supported growth in recent years,” the organisation said.

While the OECD did warn that public debt remains high this warning would have more weight if the US was not also carrying an epic amount of debt. The same goes for the UK where public debt is getting close to 104% of GDP.

The spending pressures in Italy, similar to other developed economies, are mostly stemming from the need to provide financial security to an aging population, higher interest rates (although again not as high as in some of the rest of the Eurozone), and costs associated with net zero requirements and digital transitions.

What macro data tells us about Italy

Italy’s annual inflation rate has dropped by more than 10 percentage points since reaching a four-decade high in October 2022 and is now well below the euro area average, which clocked in at 2.6% in February and 2.4% in March.

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Harmonised inflation notched up from 0.8% in February to 1.2% in March, a long way away from its epic 40-year high of nearly 12% reached in late 2022.

Analysts note that Italy is no longer growing at the rapid speed it did post pandemic but that it has managed to keep its economic activity strong enough to effectively ease inflation while skirting a recession. Italy has managed to maintain a balance between central bank interest rates and high price pressures.

Breaking down the index

Looking at the performance of the Italy’s main stock index, the most work is happening in just three or four sectors. The largest combined weight comes from banks and insurers such as Unicredit, Intesa SaoPaolo and Generali with a weight of 9.4%, 9.08% and 5.26% respectively. All three have recently reported either record high incomes or their results beat expectations with forecasts for the rest of the year being strong.

There are a number of smaller banks in the sector which carry far lower weights and these may become potential targets for consolidation further down the road.

The second largest component of the index is energy firms: Enel with a weight of 11.57% and ENI with 7.27%. Here both the risk to the downside and the upside comes mainly from geopolitics in the Middle East and Russia and Ukraine. The final two key components are tech company STMicroelectronics and car maker Stellantis, both with a strong multinational component and with solid outlooks for this year.

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