The Italian FTSE may get a lift from Draghi’s plan

A recent piece on Bloomberg was making a case that the Italian FTSE is a decent place to make a play on the Italian stock market. The reasons were as follows:

1. Mario Draghi’s plan to improve the Italian economy is boosting its undervalued shares. Draghi went to Parliament last week and gave some details of his €248 Billion plan. This plan is mainly due to be financed by the EU’s post-pandemic recovery fund. According to Bloomberg even only around half of the planned reforms would attract investor capital. This would particularly boost small and mid-caps.

According to Antonio Amendola. Portfolio manager at Acomea Sgr, ’Italy really has an epochal opportunity with the Recovery Plan. Directly for the obvious investments, it will make, but also indirectly for the necessary reforms.

2. The Italian FTSE is trading at a relative discount to its European peers. The current FTSE MIB (Italian FTSE) forward price to earnings ratio relative is about 0.77%. This is just shy of the multi-year lows hit during the COVID-19 crisis of ~0.70%.

The argument against this is the feared correction in stocks that are generally feared. The summer months would be the obvious time for a correction. However, aside from the obvious, it is hard to pinpoint a correction in stocks. Any readers with some top tips please leave a message in the comments below. One perspective I have found helpful recently has been from Ray Dalio. He asks the following six questions:

  • How high are prices relative to traditional measures?
  • Are prices discounting unsustainable conditions?
  • How many new buyers (i.e., those who weren’t previously in the market) have entered the market?
  • How broadly bullish is sentiment?
  • Are purchases being financed by high leverage?
  • Have buyers made exceptionally extended forward purchases (e.g., built inventory, contracted forward purchases, etc.) to speculate or protect themselves against future price gains?

You can read his full piece here.