While most western-European markets have recovered from the Brexit shock, Italy still has a long way to go. With a looming referendum and an ongoing banking crisis, traders are paying up to hedge against more stock turbulence.
Investors suffering the world’s biggest losses this year are bracing for a vote on political reform expected in November that could decide the fate of prime minister Matteo Renzi.
They have pushed the price of options protecting against volatility in Italian equities for the next three months to the highest since 2013 against shorter-term contracts.
Citigroup has branded the plebiscite the largest risk in European politics this year outside the UK.
Italian banks are also suffering as they scramble to shore up capital in the face of €360bn of bad debt.
For Kevin Lilley, a manager of eurozone equities at Old Mutual Global Investors, the danger is so high he cut his Italian holdings to just one company - defence firm Leonardo-Finmeccanica - after selling shares including Banca Popolare di Milano Scarl and Mediobanca.
“Italy has been so oversold in the last year because of the political uncertainty,” said Mr Lilley.
“The referendum is a completely binary event, it’s a very good thing for Italy if it’s passed because it simplifies the decision-making process. But unfortunately the prime minister has tied his future to the result and banking problems are still in the background,” he said.
Last year, when a China-led selloff erased trillions from global equities, Italy bucked the trend.
The benchmark FTSE MIB Index reached a near six-year high in July 2015, and surged an annual 13%, as an overhaul of employment laws and expectations of a domestic economic revival buoyed investor confidence.
This year, the equity benchmark has slid down the rankings, and one of the biggest exchange-traded funds tracking the market is heading for a seventh month of outflows in eight.
Italy’s banks are leading losses among European stocks amid concern over their levels of bad debt.
Banca Monte dei Paschi di Siena, which fared the worst among 51 of its peers subjected to recent European stress tests, has plummeted 80% in 2016 as its plan to offload billions in doubtful loans and increase capital failed to win over investors.
Unione di Banche Italiane earlier this month reported a second-quarter loss. The economic picture offers little comfort: Italian growth stalled in the second quarter.
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