which Italian stocks to buy while Draghi prepares new reforms


A man wears a protective mask as he sits near the Colosseum, as the spread of the coronavirus disease (COVID-19) continues, in Rome, Italy, on November 12, 2020.

Guglielmo Mangiapane | Reuters

LONDON – Mario Draghi’s new government could be good for financial and consumer recovery operations, an analyst told CNBC, as investors become more optimistic about Italian stocks.

The former head of the European Central Bank has ambitious plans to reform the country, including Italy’s judicial system, public administration and tax system – an agenda welcomed by market players who have been tentative about Italy as various governments struggled to pass. significant reforms in recent years.

“Achieving structural reform will be difficult. But after a long period of Italian underperformance, expectations are low. Therefore, any indication that Draghi may achieve growth-boosting structural reforms could lead to an upward appreciation of the Italian assets, “Investment Research analysts said the firm Gavekal Research in a note.

The FTSE MIB, Italy’s leading stock index, has risen about 7% from a January 29 low following Draghi’s appointment. But experts believe there is more room to grow.

UniCredit strategists forecast last week that the large and mid-cap segments of the Italian market could have “an absolute return potential of around 10% of the current level” in 2021.

Removing the tax burden from the workforce by reducing income taxes and employers’ social security contributions would lower employment costs, boosting business productivity.

Italy has taken steps to support businesses and citizens in the wake of the Covid crisis, including through tax deferrals. However, it will also benefit from more than € 200 billion ($ 243 billion) in European funding, which will begin to arrive later this year.

Financial actions

Mislav Matejka, head of European and global equity strategy at JPMorgan, said Draghi’s policies are “optimistic for the Italian equity market, through tighter peripheral spreads, increased political credibility and bottoming out on the momentum of activity, helped by strong fiscal support. “

“At the sector level, this is especially positive for the financial sector, as well as for consumer recovery plays,” Matejka said.

The financial sector is the largest sector among large and mid-cap Italian companies, and consumer discretionary stocks constitute the third largest sector.

Draghi, who was called to take over the leadership of the country after a political crisis emerged in January, told lawmakers that he will face some problems “that have been open for decades.”

Analysts are particularly optimistic about possible changes in the tax system.

“Shifting the tax burden off the workforce by reducing income taxes and employers’ social security contributions would lower employment costs, boosting corporate productivity,” Gavekal analysts said.

Draghi has also pledged to use upcoming European funds to focus on digitization, retraining and accelerate plans to move the country off fossil fuels.

“This reform agenda will find its counterpart in the selection of investment projects associated with facilities across the EU,” Marco Protopapa, an economist at JPMorgan, said in a note.

Last year, “Draghi emphasized the importance of the resources of the Recovery Fund for Italy by distinguishing between good debt, linked to specific expenses that improve productivity in the form of investment with a high rate of social return, versus bad debt resulting from measures scattered policies. “Protopapa said.

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