I was talking with a colleague a few weeks ago and she wondered
aloud whether the economic and political chaos in Italy -- mainly
the result of Europe's ongoing
crisis -- was creating an opening for bargain-hunting investors.
After all, we're talking about the fourth-largest
in Europe (after Germany, France and the U.K.), an economy that has
a fairly impressive industrial base. My initial thought was to
steer clear as the open-ended economic crisis in the region could
really hurt Italy in 2012, as the county enacts a set of
belt-tightening moves. But if you are a regular reader of my
articles, then you know I'm an assiduous bargain hunter.
So I decided to dig deeper.
Indeed, Italy's economic woes merit investors' attention. At least
iShares MSCI ItalyIndex Fund (NYSE:
does. The fund holds a basket of Italy's top companies, many of
which can be trusted to deliver steady results in any economic
But because this fund is down from $20 to $12 this year, and down
from $35 at the end of 2007 many may think its holdings are in deep
trouble. This is not the case. For example, 22% of the fund is
, which is sort of the "ExxonMobil of Italy." Eni's performance is
a lot more beholden to oil prices, which are quite firm, than any
Italian economic trends. The oil giant generates about $145 billion
in annual sales and typically earns about $5 per American
depositary receipt (
In fact, Eni has little to do with Italy in terms of either revenue
or expenses. This is a company with a strong presence in Europe,
Asia, Oceania, Africa and the Americas, a true multinational. As
Morningstar recently noted, "Eni stands out from many much-larger
global integrated oil peers ... because of strong diplomatic
ties forged by management. This allows the company to operate more
effectively in difficult markets such as North Africa, the Middle
East and Russia, and is well illustrated by the fact that Eni is
the largest international oil and gas producer in Africa."
Morningstar's analysts say that shares, trading at a recent $41,
are worth $65.
The EWI's second-largest position is in ENEL, which comprises 12%
of the fund. ENEL is one of Europe's largest utilities, with
operations in a number of countries. As with all other utilities,
ENEL has a guaranteed rate of return on a cost-plus basis. Its
has never wavered from the 15% to 18% range in the past eight
years, and there's no reason to expect this to change.
But here's where things get a bit tricky. The third- and
fourth-largest holdings are in a pair of banks -- Intesa SanPaolo
and UniCredit. Taken together, they comprise about 13% of the fund.
How will these banks fare in the current crisis? Nobody knows, but
it's instructive that Italy's new political leadership is focusing
on austerity measures and not seeking to fix the debt problem by
welching on loans. To be sure, these banks may post weak results
for the next year or two as the Italian economy weakens further,
but barring any change in policy that leads to loan write-offs,
these banks could represent deep-value plays once the crisis has
passed. Their shares have fallen 50% or more from their52-week
highs and now trade well below tangible
Moving further down the list are holdings such as
Telecom Italia (NYSE:
, tire maker Pirelli, eyewear purveyor
. A slowing European economy will likely dampen results in 2012 for
these firms, which the plunging share price for this fund already
appears to anticipate.
As we saw in the United States in late 2008 and early 2009, it's
darkest before the dawn, so turning aggressive when the news
appears to be extremely bleak can make for a profitable trade for
long-term investors. Italy has myriad problems, but remains as one
of the most dynamic hosts of industrial firms in Europe and
elsewhere. The fact that the euro is trading at multiyear lows
against the dollar, the yen and the yuan should make Italy's
industrial base that much more competitive.
Risks to Consider:
This is an intriguing set up, but it pays to watch events in
the next week or two before making a move. The fund is unlikely to
quickly surge in value, so you can exercise patience before making
Action to Take -->
Jumping into Italian stocks after a sharp sell-off looks to be a
wise long-term play. But you can't ignore the risk that economic
conditions could spiral even lower before they improve. As a
result, a paired trade would be ideal to protect yourself in terms
of potential downside. A short position in the
PowerShares DB 3x Italian
off-setting a long position in the Italy fund may be the best play.
When a solution to the economic crisis finally comes into focus,
is likely to appreciate much more robustly than the short position
is to depreciate.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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