What Italian stocks to buy as Draghi prepares new reforms

LONDON – Mario Draghi’s new government could be good for finance and consumer recovery, an analyst told CNBC, as investors become more bullish on Italian stocks.

The former head of the European Central Bank has ambitious plans to reform the country, including Italy’s judiciary, public administration and tax system – a program well received by market players who have hesitated to towards Italy when several governments have struggled to adopt significant reforms in recent years.

“Carrying out structural reform will be difficult. But after a long period of Italian underperformance, expectations are low. So any sign that Draghi may succeed in carrying out growth-friendly structural reforms could lead to an upward revision of prices. Italian assets, ”according to investment research analysts. Gavekal Research said in a note.

Italy’s main stock index, FTSE MIB, rose about 7% from its low on January 29 following Draghi’s appointment. But experts believe there is still room to grow.

UniCredit strategists predicted last week that the large and mid-cap segments of the Italian market could have “an absolute return potential of around 10% from the current level” in 2021.

Italy has taken steps to support businesses and citizens in the aftermath of the Covid crisis, including through tax deferrals. However, it is also expected to benefit from more than 200 billion euros ($ 243 billion) in EU funds, which are expected to start arriving later this year.

Mislav Matejka, head of global and European equities strategy at JPMorgan, said Draghi’s policies are “bullish for the Italian stock market, thanks to tighter peripheral spreads, greater political credibility and lower market momentum. activity, helped by strong budget support “.

“At the industry level, this is particularly positive for finance, as well as for consumer recovery games,” Matejka said.

Financials is the most important sector among Italian large and mid caps and consumer discretionary stocks make up the third sector.

Draghi, who was called upon to take over the leadership of the country after a political crisis erupted in January, told lawmakers he would face some issues “which have been open for decades.”

Analysts are particularly optimistic about potential changes to the tax system.

“Shifting the tax burden on the labor force by reducing income taxes and employers’ social security contributions would reduce employment costs, boosting business productivity,” Gavekal analysts said.

Draghi also pledged to use upcoming European funds to focus on digitization, requalification and accelerating the country’s transition plans to shift away from fossil fuels.

“This reform program will find its counterpart in the selection of investment projects associated with installations at EU level,” said Marco Protopapa, economist at JPMorgan.

Last year, “Draghi underlined the importance of Stimulus Fund resources for Italy by distinguishing between good debt, linked to targeted spending and improving productivity in the form of investments with a rate high social returns; and bad debts resulting from dispersed policy measures. Said Protopapa.