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Mario Draghi’s appointment as Italy’s Prime Minister heralds a new era for the world’s 8th largest and 4th most indebted economy of the world.
Mario Draghi is an economist and central banker who served as President of the European Central Bank between 2011 and 2019, was the inaugural Chair of the Financial Stability Board from 2009 to 2011 and was the Governor of the Bank of Italy from 2005 to 2011.
Apolitical and extremely seasoned economist and Central Bankers, he is EXACTLY what Italy needs at this crucial moment of its economic history.
His deep knowledge of the inefficiencies of the Italian political system, his wide experience of Europe and his constant calls for reforming Italy’s governance and industrial policies will bring tremendous value to both Italy and Europe,
On a wider scale, his nomination, together with the election of Joe Biden in the US and the nomination of an extremely capable US Administration are extremely positive signs for the world at the start of 2021.
There is no doubt that Mario Draghi’s nomination heralds a new era for Italian assets and for further European integration.
Macro Economic Background
With 60 m million people and US$ 2 trillion of GDP, Italy’s is Europe’s third largest economy and the world’s eight largest. Despite a vibrant small and medium sized enterprise sector, its public finances metrics are amongst the worst in the word, with structurally high unemployment and the fourth largest public debt to GDP ratio in the world.
On the positive side, its large export sector has always made it benefit from current account surpluses.
As one of the first country to be affected by COVID and to resort to massive lockdowns, the Italian economy was severely impacted in 2020 and will also suffer another contraction in 2021.
Italy’s GDP
Italy’s gross domestic product shrank 6.6 percent year-on-year in the fourth quarter of 2020, illustrating the double dip scenario imposed by the second wave of the virus in the 4th quarter of 2020.
Unemployment
Between 2014 and 2019, Italy was on a strong improvement path when it comes to unemployment, succeeding at lowering what has been a structural impediment to its efficiency.
Covid sent unemployment rates back to almost 10 % but the recovery is now showing signs of translating into labor improvements.
Budget deficit
Constrained by its extremely high indebtedness, Italy did a good job at bringing its public deficits under control in the past 10 years, but will be negatively impacted in 2020.
There is no doubt that Mario Draghi’s vast experience as Italy and Europe’s Central Banker will make him focus on re-igniting growth, boosting employment, reducing regulatory pressures and reforming the main hurdle of Italy’s historically unstable political system coming form its Parliamentary democracy.
We expect Mario Draghi to work as much on the economy by boosting public expenditures as we will on reforming the Italian political and constitutional system.
The question for investors the becomes :
What is the best way to benefit from this new era ?
Italian equities have been rightly saluting his nomination as Prime Minister, jumping 7 %in the past week.
When looking at the long term chart, barring a global correction in the world equity markets, Italy’s FTMIB index is bound to finally breach the 25’000 level in the coming months, taking the market out of the horizontal consolidation pattern in pace since 2009 and unleashing a ne secular bull market with an ultimate objective at 40’000.
Italian corporate profits should see strong rebound in 2021 and 202, putting the index on relatively attractive valuation metrics at 11x forward earnings and almost 4 % dividend yield in 2021.
Investors can certainly allocate a portion of their portfolio to Italian equities at this stage from a fundamental standpoint, using ETFS.
BUT WE SEE A BETTER WAY TO PLAY THE MARIO DRAGHI ERA
BUY UNICREDIT Spa. UCG IM @ EUR 8.3
UniCredit S.p.A. is an Italian global banking and financial services company. Its network spans 50 markets in 17 countries, with more than 8,500 branches and over 83’000 employees.
Its strategic position in much of Europe gives the group one of the continent’s highest market shares.
With total assets of 836 Billon and a market capitalisation EUR 18.5 Billion, UNICREDITO is Italy’s largest bank, Europe’s 11th largets bank with subsidiaries in most European countries.
- Bank Austria (Austria)
- HypoVereinsbank (Germany)
- UniCredit Bank Czech Republic and Slovakia (Czech Republic, Slovakia)
- UniCredit Bank Bosnia and Herzegovina (Bosnia and Herzegovina)
- UniCredit Bank Ireland (Republic of Ireland)
- UniCredit Bank Hungary (Hungary)
- UniCredit Bank Romania (Romania)
- UniCredit Bank Russia (Russia)
- UniCredit Bank Serbia (Serbia)
- UniCredit Bank Slovenia (Slovenia)
- UniCredit Bulbank (Bulgaria)
- UniCredit Corporate & Investment Banking (Italy)
- UniCredit International Bank Luxembourg (Luxembourg)
- UniCredit Leasing (Italy)
- Zagrebačka banka (Croatia)
Financials
Despite stable revenues due to consolidation, cost cutting and and non-performing loan management, UNICREDITO is expected to see a massive recovery in its net profits and earnings per share in 2021 to 2.1 billion EUR of profits, putting it on an 11 % earnings yield.
While still hampered by high ratios of Non-performing loans, its 76 % discount to book value gives it a significant valuation buffer.
Analysts are now starting to upgrade their ratings on the stock
Technical Analysis
UNICREDITO is real to break out of its recent consolidation range
Unicredito is not only a global call on Italy’s recovery, but also on the whole of Europe’s economy.
We see the current levels as a significant entry point for long term investors wanting to build their exposure to Europe’s recovery and Italy new era under Mario Draghi.
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