Amid all the headlines detailing significant fiscal woes in
the eurozone's peripheral countries, the iShares MSCI Italy Index
) has been a solid performer over the past year. The lone ETF
devoted to the eurozone's third-largest economy was up nearly 14
percent over the past 12 months before the start of trading
Not too shabby for a country mired in a recession and one
often dubbed as the next shoe to drop after Greece and Spain. On
the other hand, EWI's risk-adjusted returns are not that
impressive. In the past 12 months, EWI has essentially performed
in line with the S&P 500. While U.S. GDP growth is not
setting the world on fire, it is superior to Italy's.
The U.S. is not officially in a recession. Italy is. And for
the pleasure of dealing with those factors, investors get an ETF
that has a beta of over two against the S&P
Combine dour macro factors with the risks that come along with
owning EWI and it would appear that there are more compelling
ways to play an ongoing rebound in European equities. However,
there is another side to the story.
iShares Global Chief Investment Strategist Russ Koesterich
upgraded his view of Italy to Neutral from Underweight, saying
that the concerning outlook for Italy's economy may already be
priced into the country's stocks.
"While Italy's growth outlook remains dire, prices of Italian
shares already reflect this,"
said Koesterich in a note
The good news as it pertains to Italian equities comes by way
of the bond market. Italian 10-year sovereigns yielded north of
six percent for much of July and August,
according to Bloomberg data
, but that yield has collapsed to about 4.2 percent today,
indicating the country's borrowing costs are falling.
"Despite the short-term pain inflicted on the economy by
difficult reforms, the reforms have made a big difference in
restoring Italy's credibility and competitiveness," said
Koesterich. "Thanks to the country's fiscal reform and the
European Central Bank's bond buying commitment, Italy's borrowing
costs have fallen significantly over the past six months."
Adding to the EWI dichotomy is the ETF's sector composition.
Financials account for over 30 percent of the fund's weight and
with European banks seemingly constantly ensconced in
controversy, that sector allocation could be problematic for
conservative investors. On the other hand, EWI is arguably a
stealth high oil price play because the energy sector receives an
allocation of almost 31 percent and Eni SpA (NYSE:
) alone accounts for almost 23 percent of EWI's weight.
Then there is the 10.4 percent weight to industrials, which
may be even more problematic than the ETF's bank exposure.
Italy's November industrial orders slipped 0.5 percent while
industrial output for that month fell one percent. The economy
there is expected to contract one percent this year.
Adding to the near-term risk for EWI is that Italy, arguably
one of the least politically stable developed market nations,
holds elections in February. On the bright side, investors do not
have to pay a premium for taking a flier on EWI. The ETF's P/E
ratio is 12.59 and its price-to-book ratio is just 1.25. That
means EWI is
cheaper than the iShares MSCI Germany Index Fund
), among others. Curiously, those others include the
iShares MSCI Spain Index Fund (NYSE:
), which could be perceived as even riskier than EWI.
For more on
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