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News Analysis: Weak Italian Stock Exchange could become drag on Italy's recovery

English.news.cn   2014-08-08 02:35:16

by Eric J. Lyman

ROME, Aug. 7 (Xinhua) -- After rallying in the fist part of the summer, the Italian Stock Exchange in Milan is on a losing streak, with around 12 percent of its value evaporating in the last eight weeks, which, according to experts, would possibly hinder the already mixed chances for an economic turnaround.

Part of the methodical selloff has been sparked by weak macroeconomic figures from Italy -- the economy is growing slower than hoped, forcing downward revisions for full-year gross domestic product growth, and unemployment levels remain stubbornly high, particularly for young workers. Just this week, Italy revealed the economy shrank again in the second quarter of this year.

Those factors are balanced by some positive indicators: yields on government bonds are low, consumer confidence is inching higher, and industrial production is slowly on the rise. Approval levels of the government remain strong.

But much of the factors driving investors out of Italian stocks come from abroad: investors spooked by the collapse of Portugal's Banco Espirito Santo, while European exports continue to be hurt by a strong euro and the European Union is still on its political heels after the strong performance of eurosceptical parties in the European Parliament elections this May.

"A lot of what is driving stocks lower is based on events from beyond Italy, but the result could have significant impacts on Italy," Oliviero Fiorini, an analyst and economist with ABS Securities in Milan, said in an interview.

Direct stock ownership in Italy is lower than in many industrialized countries. But Fiorini said a weak stock exchange could still have impacts.

"To a large degree, the stock exchange's performance is a reflection of investor sentiment," he said. "Lower stock process also means companies have less money for expansion, research, hiring new workers. It impacts the money supply in the country as a whole."

It is still not clear whether the downward trend -- which included a nearly 5 percent drop between Tuesday and Thursday's sessions -- will stretch out for weeks, or whether it is just a temporary blip.

The next round of macroeconomic figures, financial results from publicly traded companies, and the health of the European economy as a whole could all be factors.

"If it's a short-term development, then there's nothing to worry about," Marina Brogi, a professor of International Banking and Capital Markets at La Sapienza University in Rome, told Xinhua. "But if this ends up lasting a long time, then, yes, there is something to worry about."

It was a rally in the stock market following the arrival of reform-minded Matteo Renzi as prime minister in February that sparked much of the speculation that Italy's decade-long economic malaise might finally be drawn to a close.

The Italian stock Exchange's blue-chip index was at 18,800 points during closed-door negotiations that saw Renzi oust predecessor Enrico Letta in February. From that point, the market rallied as confidence in Renzi's reforms increased and the European Parliament vote in late May gave the unelected prime minister an electoral mandate many said he needed.

The index touched a 52-week high of 22,590 points on June 11 before the trend was reversed. After losses on Wednesday, the index closed beneath 20,000 points for the first time since March. Securities analysts say it could sink still lower.

"Nobody's too worried yet," former Bank of Italy economist Enzo Abbate said in a research note. "But if the trend continues that could change very quickly."

Editor: yan
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