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Another Political Test For This Italy ETF

February 27, 2018 10:14 am
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Another Political Test For This Italy ETF

On a historical basis, Italy is politically volatile relative to other developed markets. Since 2001, Italy has had seven prime ministers, more than double the number of presidents the U.S. had over the same span.

Italian equity markets and the related exchange traded funds, such as the iShares MSCI Italy ETF (NYSE:EWI), face another political test in the coming days, as Italy is slated to hold general elections March 4. 

“The key to power lies not just in forging allegiances, but navigating complex new electoral laws,” BlackRock said in a note. “The election comes against an improving economic picture and Italian equities have performed strongly over the last year, outpacing many other developed markets including the broader eurozone and the U.S.”

Expecting A Hung Parliament

Although Italy is the Eurozone's third-largest economy, EWI does not boast a large roster. The largest Italy ETF trading in the U.S. holds just 24 stocks.

Investors should expect a hung parliament — where no party has an absolute majority — following the upcoming election.

“Our base case for the March 4 Italian general elections is a hung Parliament leading to a grand coalition between the major centrist parties,” said BlackRock. “However, we encourage investors to follow the election in case of a surprise showing by populist parties leading to renewed questions over the future of the eurozone.”

EWI reflects the volatile nature of Italian equity markets. The ETF has a three-year standard deviation of 19.1 percent, well above the 14.4 percent found on the diversified iShares MSCI Eurozone ETF (CBOE: EZU).

Improving Fundamentals

It took awhile, but Italy's economy is showing signs of improvement — and those improving fundamentals could buffer the country's financial markets from significant downside resulting from the March 4 elections. EWI is up just over 6 percent year-to-date.

Much like elections in other developed markets, investors should not expect much in the way of promises being made good following the upcoming Italian ballot. 

“All the parties are making what are likely unrealistic electoral promises: These include a universal income proposal, a flat tax for households and companies and the partial rollback of labor market and pension reforms,” said BlackRock. “However, even if these promises are unlikely to materialize in their current form, it is likely that the government deficit will increase and the fiscal tightening implied in the current stability plan will not take place, in our view.”

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