Italy Leads Europe: Are Stocks Pricing In A Recovery?

By
A A A

Italy's stock market outperformed all global markets and led a broad rally across Europe Monday after the country ushered in a new government led by a prime minister who pledges to pursue ambitious economic growth policies, boosting investor confidence.IShares MSCI Italy ( EWI ) surged 2.73% to 13.22, a nine-week high.

IShares MSCI Spain ( EWP ) added 2.42% to 31.32, a six-week apex.

IShares MSCI EMU ( EZU ), with exposure to nearly 250 eurozone stocks, rose 1.95% to 34.53, a 12-week peak.

IShares MSCI EAFE Index Fund ( EFA ), tracking developed foreign markets, jumped 1.24% to 61.84 -- a two-year zenith.

CurrencyShares Euro Trust ( FXE ), tracking the euro against the dollar, popped 0.49% to 129.81, regaining its 10-week average and confirming a strong uptrend.

Italy's new prime minister, Enrico Letta, promised to turn around the economy in 18 months by reforming electoral law, suspending a property tax, cutting ministers' salaries and urging European leaders to reverse austerity measures.

"A new government in Italy suggests that there will be stability in that country for a while, which prompts investors to take advantage of low prices," Ethan Anderson, senior portfolio manager at Rehmann Financial, said in an email. "Europe has room to run until the next big budget headline comes out, which could be any day." Europe's economy cannot grow with an aging population and a birthrate lower than the replacement rate, he added.

ETFs tracking the euro and most European countries are trading above both their short-term 50- and 200-day moving averages, indicating a strong bullish uptrend. Being a forward-looking indicator, the stock market may have priced in the negative news and sees an economic recovery ahead. IShares ETFs trackingIreland (EIRL), the U.K. (EWU) andSwitzerland (EWL) hit fresh 52-week highs Monday.

"Though Italian or European markets may not be currently reflective of the recessionary environment, the region's economic problems are far from over and will limit market potential unless there is a reversal of German-led austere fiscal policies," contends Viktoria Palushaj, an analyst at CitrinGroup in Birmingham, Mich. "Until then, economic fundamentals in the region will only worsen, leaving only market speculation and trivial news to help lift European market activity."

On the other hand, deficit cuts in Spain, a sharp drop in government bond yields and "a shift towards expansionist policies in Europe" support higher stock prices, says Jeremy Siegel, an investment strategist at WisdomTree Investments.

"The sharp decline in the probability of a banking crisis has propelled European stocks upward despite the still-dismal economic news," Siegel wrote in a client note Monday. "And there are expectations that the European Central Bank will lower the policy rate once again and perhaps encourage some softening of the euro exchange rate."

While Europe is home to a disorganized and inefficient government, it boasts many profitable, innovative but undervalued companies, says John Alan James, a professor at Pace University's Lubin School of Business.

"The basic Italian engineering, product design and development is among the best in the world," he said in an email. "In a strong economy, they dominate certain industries such as food packaging machinery and other finely tuned machinery like Ferrari."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: EFA , EWI , EWP , EZU , FXE

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Stocks

Referenced

Most Active by Volume

48,099,947
  • $16.09 ▲ 0.50%
40,277,806
  • $102.50 ▲ 0.24%
40,236,499
  • $19.57 ▲ 2.35%
31,092,510
  • $49.75 ▲ 0.65%
30,795,218
  • $34.92 ▲ 0.78%
29,910,855
  • $3.63 ▲ 0.83%
24,019,154
  • $13.06 ▼ 0.38%
23,753,906
  • $74.82 ▲ 1.31%
As of 8/29/2014, 04:04 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com