Italy, the Eurozone's third largest economy, recently held national elections that resulted in a hung parliament and a widening divide between the country's wealthy northern areas and the less affluent south. In a sign that global populism has not died, the anti-euro 5-Star Movement proved popular among voters in southern Italy.
While the results of Italy's election did not produce an official governing regime and can be seen as controversial to outsiders, the iShares MSCI Italy Capped ETF (EWI), the largest Italy exchange-traded fund (ETF) trading in the U.S., is up 3.63% since the election. (See also: Top 4 ETFs to Track European Stocks in 2018.)
Political controversy and volatility come at a potentially precarious time for EWI and Italian stocks, as the once moribund economy is showing signs of life. "The Italian economy surprised on the upside during 2017, expanding by 1.5%, the best performance since 2010," said Markit. "This was positive after Italy faced a toxic climate in late-2016, with a lost referendum on constitutional reform forcing the prime minister to resign and its banking sector riddled with record-high non-performing loans and a state rescue of several banks with potentially damaging consequences for small savers."
EWI follows the MSCI Italy 25/50 Index and holds 24 stocks. The ETF's performance is intimately tied to that of the Italian banking sector, as EWI allocates nearly 36% of its weight to financial services stocks. That is more than double the ETF's energy exposure, its second largest sector weight. Investors considering EWI should be mindful of any increase in political volatility because Italian stocks are already more volatile than broader European benchmarks. EWI has a three-year standard deviation of 18.91% compared with 12.99% on the MSCI Europe Investable Market Index. (For more, see: Reducing Volatility With Europe ETFs.)
How the election results affect Italian economic growth remain to be seen, but some analysts are exercising caution. "Heightened political squabbling threatens to tilt back recently improved business and consumer confidence, which has stood up well to stagnant real wage growth, higher than normal unemployment and uncertain job security," said Markit. "Nevertheless, the immediate impact on the economy is likely to be moderate, with political gridlock mitigated by low sovereign and private borrowing costs, alongside Italy continuing to exploit strong economic conditions across the Eurozone and the global economy."
Since the start of March, the $725 million EWI has not added or lost any assets. (For additional reading, check out: Is Germany Carrying the European Economy?)