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Investors Dive Back Into Italy Even as Recession Bites

Italy has been one of the biggest beneficiaries of this year’s global market resurgence, a surprise given the unease swirling around the southern European nation and its battered banks.

The Italian economy slipped into recession in the last quarter of 2018. Analysts say the governing coalition of the anti-immigration League party and the antiestablishment 5 Star Movement may not survive the year, offering the potential for further politically inspired volatility.

Yet the benchmark FTSE MIB stock index is among the best performing in Europe, up 11% this year. And offers for newly issued Italian government bonds have far exceeded supply, a testament to the appeal of the country’s higher interest rates, which are near records relative to German rates.

“We don’t like Italy because of the amount of debt they have, their ability to pay that debt, but they offer a yield you can’t get anywhere else,” said Paul Brain, head of fixed income at Newton Investment Management, the BNY Mellon subsidiary. “A whole pension industry and insurance industry in Europe is trying to put their money somewhere,” he added.

The yield on 10-year Italian government bonds was 2.80% Monday. The equivalent German paper yields just 0.11%, close to the widest spread between the two since the euro sovereign-debt crisis abated in 2013.

Dickie Hodges, head of unconstrained fixed income at Nomura, bought shorter-term Italian government bonds last year, including three- and five-year paper, which he sold when markets rallied last month, and recently bought 30-year Italian government debt.

“We are in an environment where we have begun to accept that growth is slowing and interest rates nowhere in the world are going higher in 2019,” he said. “It is people expecting the [European Central Bank] and [ECB President Mario] Draghi to be more supportive to capital markets,” Mr. Hodges added.

Economic clouds loom over Italy, including the country’s mounting debt and weak industrial production data. The European Commission slashed its growth forecasts for the country from 1.2% to 0.2% for 2019 earlier this month, which would be the lowest annual growth in five years.

“When you look at the macroeconomic standpoint the picture has worsened, it is back into recession and we don’t really see a turning point coming, ” said Vincent Mortier, deputy chief investment officer at Amundi Asset Management.

Italian markets tumbled last year as a new populist government began down a collision course with Brussels, announcing budget-deficit plans that broke the European Union’s rules on fiscal discipline.

Investors’ biggest concerns eased somewhat after Rome, the eurozone’s biggest government borrower, reached an agreement with the EU in December, avoiding the bloc’s disciplinary proceedings.

The Italian government has pounced on that turn to raise much-needed financing. Its sale of EUR8 billion ($9.04 billion) in 30-year government bonds at the beginning of February racked up EUR41 billion in orders, with foreign investors taking almost three-quarters of that issuance. Italy has issued a total EUR47 billion of domestic medium and long-term debt this year, almost one-fifth of its yearly target for domestic bonds, according to estimates from UniCredit fixed-income strategist Chiara Cremonesi.

The market’s warm spell has been especially good for banks, whose struggles with bad loans have been at the center of investors’ concerns about Italy. UniCredit, the country’s largest lender, gained 12.9% over the last week, while Banco BPM rose 14.5% after a central bank report revealed a 34% year-over-year decline in bad loans in December, a bigger improvement than analysts expected.

Bank stocks also have been helped by analysts’ expectations that the ECB will extend its Targeted Longer-Term Refinancing Operations, a program that provides targeted cheap loans to banks, a large portion of which has gone to Italian lenders.

Some observers also are predicting Italy’s jumbled politics may be a positive for the stock market more broadly. Regional elections this month showed Interior Minister Matteo Salvini and his center-right alliance gaining support. Analysts say a fresh national election could buoy markets if Mr. Salvini forms a government without the euroskeptic 5 Star Movement, which is seen as less friendly to investors.
Source: Dow Jones

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