Italy Stocks Beating World Lure U.S. Buyers as S&P 500 Lags

May 02, 2014 6:09 am ET

(Updates with BlackRock stakes in seventh paragraph.)

May 2 (Bloomberg) -- Betrayed by their favorite stocks at home, American investors are piling into a market that is behaving like U.S. equities did last year: Italy.

A U.S. exchange-traded fund of companies from Eni SpA to lender UniCredit SpA has lured $475 million in 2014, the most in Europe after ETFs for Spain and the U.K. Money is arriving amid a 15 percent rally in the FTSE MIB Index, the biggest among 24 developed-market equity gauges tracked by Bloomberg. The advance is about what the Standard & Poor’s 500 Index did in the first four months of 2013. This year, the U.S. up 1.9 percent.

With Italian consumer confidence at a four-year high, optimism is growing that the FTSE MIB will be able to break away from nine years of underperformance versus the Stoxx Europe 600 Index. Shares in the gauge have regained half the value lost between 2007 and 2009, when the financial crisis pushed the largest economies into a recession. Equities are tracking gains in bonds as yields fell to a record low, helped by European Central Bank President Mario Draghi’s pledge to save the euro.

“It’s all about declining bond yields and credit spreads and the recovery in the financial sector, which has been the real leader,” Jean-Paul Jeckelmann, who helps manage $1.5 billion in equities as chief investment officer at Banque Bonhote & Cie. in Neuchatel, Switzerland, said in an interview. “After poor performance in the 2010-2012 period, sentiment is getting much better.”

Stock Rally

The FTSE MIB has rallied 76 percent from July 2012, when Draghi made his pledge, and reached an almost three-year high on April 4. Companies in the index have added more than 180 billion euros ($250 billion) in value during that time. The benchmark gauge slumped 13 percent in 2010 and 25 percent the following year on concern the region’s sovereign-debt crisis would spread.

Banks, which account for 27 percent of the FTSE MIB, posted five of the six biggest gains in the gauge this year. Banca Popolare di Milano Scarl soared 61 percent, while Intesa Sanpaolo SpA and Banca Monte dei Paschi di Siena SpA each climbed 37 percent. Fiat SpA, the carmaker that agreed to buy the rest of Chrysler Group LLC in January, surged 46 percent for the second-biggest rally in the index.

BlackRock Inc. increased its stake in UniCredit to 5.2 percent in March, becoming the largest investor in the Italian lender, according to the bank’s website. The world’s largest money manager also raised its holding in Intesa to 5 percent in February, making it Intesa’s second-largest investor.

Bond Yields

The yield on 10-year Italian bonds dropped to 3.07 percent on April 30, the lowest on a closing basis since Bloomberg started gathering the data in 1993. Borrowing costs reached a euro-area record of 7.26 percent in November 2011 as the region’s debt crisis deepened. Investors last month received the lowest yield to own Italian debt over German bunds since 2011.

“Investors felt more comfortable that the worst of the crisis is behind us,” Andreas Nigg, head of equity and commodity strategy at Vontobel Asset Management AG, said from Zurich on April 30. “U.S. investors have moved into European equities, especially the periphery, with Italy and Spain being by far the biggest part of this. So it has more to do with optimism on the recovery.”

Italy’s longest recession since World War II ended last year. Gross domestic product will rise 0.5 percent in 2014 and 1 percent in 2015 after contracting for two years, according to the median economist forecast compiled by Bloomberg. The economy in the euro area will expand 1.1 percent this year and 1.5 percent next, the projections show.

Fund Flows

Traders poured money into the iShares MSCI Italy Capped ETF for four straight months and invested $1.1 billion in the iShares MSCI Spain Capped ETF this year, data compiled by Bloomberg show. The iShares MSCI United Kingdom ETF received $512 million in 2014.

The FTSE MIB trades at 16.1 times its member’s estimated earnings on average, compared with 15 for the Stoxx 600, the data show. Spain’s IBEX 35 Index is valued at 16.5 times.

The gains came as Italian Prime Minister Matteo Renzi took the reins in February after toppling Enrico Letta, an intra- party rival. Letta followed Mario Monti, Silvio Berlusconi and Romano Prodi as the fourth premier in a row to fall after losing support in parliament. Berlusconi, who is appealing a conviction for engaging a minor in prostitution, is now working with Alzheimer’s patients after a one-year prison sentence was commuted to community service.

Record Unemployment

Renzi is seeking to revive the labor market and boost domestic demand. The unemployment rate remained at 12.7 percent in March, almost double what it was in 2008. The government passed a budget plan last month aimed at supporting demand by cutting payroll taxes, following a March bill that focused on removing obstacles to hiring with fixed-term contracts.

“There is a lot of enthusiasm with Renzi for a recovery in Italy, which is why we had the strong run year-to date,” Jeremy Gaudichon, who helps oversee about $1.3 billion at KBL Richelieu Gestion in Paris, said in an interview. “This seems to be a bit excessive regarding the challenges the country has. There are still many reforms to be made, and Italy has one of the highest levels of public debt in Europe. They probably need to do more than the average.”

Italy is more indebted than any other country in the euro area except Greece. The government predicted last month that public debt as a ratio of GDP will climb to a post-war record of 134.9 percent, up from a peak of 132.6 percent in 2013. That’s more than double the European Union’s 60-percent ceiling.

Still, business confidence in Italy rose to the highest since June 2011 last month, while consumer confidence jumped to the highest level since 2010.

“The efforts in economic reforms should help Italian companies,” said Benno Galliker, a trader at Luzerner Kantonalbank AG in Lucerne, Switzerland. “However, it remains to be seen if these countries will be able to implement their reforms. The low interest-rate environment could also dampen the enthusiasm for reforms.”

--With assistance from Minh Bui in Tokyo and Marco Bertacche in Milan.