A man wears a protective mask while sitting near the Colosseum, while the spread of coronavirus disease (COVID-19) continues, in Rome, Italy, 12 November 2020.
Guglielmo Mangiapane | Reuters
LONDON – Mario Draghi’s new government could be good for finances and consumer recovery, an analyst told CNBC, with investors becoming more optimistic about 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 welcome agenda for market participants who are hesitant in Italy, as several governments struggle to undergo significant reforms in recent years.
“Carrying out structural reform will be difficult. But after a long period of poor Italian performance, expectations are low. Therefore, any signs that Draghi may succeed in achieving structural reforms that boost growth may lead to an upward revaluation of Italian assets, “investment research analysts firm Gavekal Research said in a note.
The FTSE MIB, Italy’s main stock market index, rose about 7% from a low on January 29 due to Draghi’s appointment. But experts believe there is more room to grow.
UniCredit strategists predicted last week that large and mid-cap segments in the Italian market could have “an absolute performance potential of around 10% of the current level” in 2021.
Transferring the tax burden on the workforce by reducing income tax and employers’ social security contributions would reduce employment costs, increasing corporate productivity.
Italy took steps to support businesses and citizens after the Covid crisis, including through tax deferrals. However, it is also expected to benefit from more than 200 billion euros ($ 243 billion) in European funds, which are expected to start coming in later this year.
Financial actions
Mislav Matejka, head of strategy for global and European equities at JPMorgan, said Draghi’s policies are “optimistic for the Italian stock market, through narrower peripheral spreads, greater policy credibility and reduced activity momentum, helped for strong fiscal support. “
“At the sector level, this is especially positive for the financial sector, as well as for the recovery of the consumer,” said Matejka.
The financial sector is the largest sector among large and medium-sized Italian companies and consumer goods stocks are the third largest sector.
Draghi, who was called on to take the lead in the country after a political crisis broke out in January, told lawmakers he will deal with some problems “that have been open for decades”.
Analysts are particularly optimistic about possible changes in the tax system.
“Transferring the tax burden on the workforce by reducing income tax and employers’ social security contributions would reduce employment costs, increasing corporate productivity,” said Gavekal analysts.
Draghi also pledged to use the next European funds to focus on digitization, requalification and to accelerate plans for the country’s transition from fossil fuels.
“This reform agenda will find its counterpart in the selection of investment projects associated with facilities across the EU,” said Marco Protopapa, economist at JPMorgan, in a note.
Last year, “Draghi emphasized the importance of Recovery Fund resources for Italy by distinguishing between good debt, linked to targeted spending that increases productivity in the form of investment with a high rate of social return, and resulting bad debt. of dispersed political measures, “Protopapa said.