A man wears a protective mask while sitting near the Colosseum while the spread of coronavirus (COVID-19) continues, on November 12, 2020 in Rome, Italy.
Guglielmo Mangiapane | Reuters
LONDON – Mario Draghi’s new government could be good for financial and consumer recovery, an analyst told CNBC as investors push for more Italian shares.
The former head of the European Central Bank has ambitious plans to reform the country, including the Italian judiciary, the public administration and the tax system – an agenda welcomed by market players who have been tentatively opposed to Italy as several governments have struggled in recent years have to carry out any meaningful reforms.
“Implementing structural reform will be difficult. But after a long period of Italian underperformance, expectations are low. Any signs that Draghi may succeed in promoting structural reforms could lead to an upward revision of Italian assets,” “said investors’ analysts. firm Gavekal Research said in a note.
The FTSE MIB, Italy’s most important stock market index, rose 7% from a January 29 low following Draghi’s appointment. But experts say there is still room for growth.
UniCredit strategists predicted last week that large and mid-cap segments in the Italian market could have an absolute performance potential of around 10% from current levels by 2021.
Shifting the workforce tax burden by reducing income taxes and employers’ contributions to social security will lower employment costs, increasing business productivity.
Italy has taken measures to support businesses and citizens in the wake of the Covid crisis, including through tax cuts. However, it will also benefit from more than 200 billion euros ($ 243 billion) in European funds, which will start later this year.
Financial equities
Mislav Matejka, head of global and European equities strategy at JPMorgan, said Draghi’s policies were ‘bullish for the Italian stock market, driven by tighter peripheral spreads, greater credibility of the policy and the decline in momentum of activity, aided by strong fiscal support. ‘
“At the sector level, it is particularly positive for Financials, as well as the recovery of consumers,” Matejka said.
Finance is the largest sector among Italian large and medium-sized enterprises, and the discretionary shares of consumers form the third largest sector.
Draghi, who was called upon to take over the country’s leadership after a political crisis erupted in January, told lawmakers he was going to deal with some issues “that have been open for decades”.
Analysts are particularly positive about possible changes to the tax system.
“Shifting the workforce’s tax burden by reducing income taxes and employers’ contributions to social security would lower employment costs, increasing corporate productivity, ” Gavekal analysts said.
Draghi also promised to use the upcoming European funds to focus on digitization, re-creation and to expedite plans for the country’s transition from fossil fuels.
“This reform agenda will find its counterpart in the selection of investment projects related to EU facilities,” said Marco Protopapa, an economist at JPMorgan.
Last year, Draghi emphasized the importance of the Recovery Fund resources for Italy by distinguishing between good debt, linked to targeted, productivity-enhancing spending in the form of investments with a high social rate of return, as opposed to bad debt due to diversified policies, ‘ Said Protopapa.