Even with the implementation of extremely accommodative monetary policy conditions across the Euro Area intended to promote growth, inflation, and spur lending, equities have not benefited as greatly as anticipated owing to a host of factors. For Italy in particular, challenging domestic economic conditions and lacking fiscal stimulus measures have prevented the economy from rebounding following the sovereign debt crisis. The Italian FTSE MIB equity benchmark has been especially hard hit following the revelations that lingering aspects of the debt crisis remain intact such as nonperforming loans and high unemployment. With no quick fix and the government dragging its heels on action to promote increased lending and growth, the FTSE MIB looks likely to sees domestic conditions drag down performance of the index and constituent components over a longer-term horizon.
ECB Gains Fade Quickly
Although the added stimulus from the European Central Bank was greeted with substantial optimism and hope that the European recovery would get back on track, the FTSE MIB reaction in the days and weeks after has painted a sharply different picture. On the macroeconomic level, Italy has been struggling to deal with a multitude of issues. The biggest harbinger of times to come is headline consumer inflation, which is currently printing at -0.30% on an annualized basis. Falling prices are usually a strong indication of weak demand which in part can be traced to poor fundamental conditions. Unemployment in particular underlines the problematic state of the Italian economy, currently at 11.50% as of the January report, and remains a key detractor from GDP growth and consumption in the economy. The absence of fiscal policy designed to stimulate growth and investment locally makes the investment environment for businesses especially difficult.
Looking at the FTSE MIB components on a more micro level it is easy to visualize the complications hampering performance across the index. On an annualized basis, only 10 out of 40 components in the index actually showed positive returns. The financial sector in particular stands out as the worst performer, led lower by Banca Monte Dei Paschi plunging by -78.36% over the last year. The financial sector’s exposure to nonperforming loans have weighed on lending metrics across the country, creating a need for deleveraging and inhibiting a stronger recovery in leading fundamental indicators. Loans to the private sector continue to shrink, hitting €791.935 billion after reaching highs of €914.848 billion in 2011, constraining corporate borrowing and keeping upside in the MIB capped to a degree. Additionally losses in the energy sector have dragged on MIB returns, with oil and gas servicing corporation Saipem crumbling by -70.86% over the past year.
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