Politics of the eurozone return to investors’ attention as Italy goes to vote

The politics of the eurozone could return to investors’ attention in the coming weeks with the Italian general election scheduled on February 24 and 25, Neil Dwane, chief investment officer for Europe at Allianz Global Investors has warned.

Despite the inevitable uncertainty about the outcome of the election, polls currently indicate that a centre-left coalition could emerge which, as in the US Congress, may control the Lower House but not the Senate.

It appears that Mario Monti may not be in this coalition, as his austerity plans have made him less popular. This change in composition may challenge some of the confidence of international investors, Dwane said. The right wing, with Silvio Berlusconi revived, seem to be some way behind and possibly the greatest unknown will be the growing “protest vote” party, led by the comedian Beppe Grillo.

“Whilst the election may provide many of the headlines, what will be crucial to assess in Q2 2013 is the direction of Policy. Monti’s austerity is now in place and being enforced and its benefits are only now beginning to be perceived. Nevertheless, any wavering or relaxation might become a concern, especially as Italy has only to make some small budget savings to reach a balance where Sovereign debt is not growing – which is unlike the challenges of Spain, France and the UK where budget deficits are closer to 10% of gross domestic product,” he said.

Following the elections, Italy may remain consigned to a future which looks very much like the last 20 years: low growth, low economic momentum and susceptible to regional and global pressures, and burdened by high debts at the sovereign level.

Low productivity is one of the key factors, highlighted by a new AllianzGI report, resulting in poor competitiveness, not only compared to Germany, but also to the rest of the peripheral EU countries. Constant wage hikes have led nominal unit labour costs to rise by more than 30 % since 2000. In contrast, this figure increased in Germany by slightly less than 10% during the same period.

On a standalone market basis, Italy currently looks very cheap at 8x when measured on a cyclically adjusted price earnings basis (CAPE); compare that with the USA on 22x, Japan on 16x and MSCI Europe on 14x. At AllianzGI’s recent Investment Forum it was concluded that most European markets are cheap when compared to many developed and developing markets, although this perhaps is not surprising in light of the extent of the EU crisis.

Dwane added: “On a very long-term basis, Italy is cheap but shorter term prospects seem to be more challenging as the economy is below stall speed and would need the longer term restructurings to offer hope of a reversion to mean levels. We think many investors still confuse the prospects of Italian companies with the problems of Italy; but this is a mistake as nearly 50% of profits derive from outside Italy. In fact we think a number of Italian companies can be identified that have a truly global footprint and low dependence on Italy’s GDP growth.”

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