(Bloomberg) -- No government is better than a bad government, for some investors.
Almost two months after national elections, Italian political leaders have reached an impasse in their attempts to form a government. And yet, the country’s benchmark stock index closed at the highest in more than eight years on Tuesday as rising corporate profits support an improving economic scenario.
The FTSE MIB rose 0.2 percent to 24,035.49 on Tuesday, the highest since Oct. 21, 2009, taking its advance this year to 10 percent, the best performance among major European markets.
“Investors are unconcerned about the political impasse: better to stay without a government than having one led by questionable figures,” said Lorenzo Batacchi, portfolio manager at BPER Banca. “I expect Italy will continue to rise more than the European market this year, even though the outperformance versus Europe starts being a bit too wide.”
In the latest attempt, President Sergio Mattarella on Monday asked Roberto Fico, speaker of the lower house, to seek a compromise between the anti-establishment Five Star Movement and the center-left Democratic Party, after Five Star failed to reach a deal with a center-right alliance.
Scenarios with either Silvio Berlusconi’s Forza Italia or the Democratic Party in a coalition with populist parties have also helped investors’ complacency. Italy’s economy, the euro region’s third-biggest, expanded last year at the fastest pace since 2010. Still, almost two months after the elections, the political gridlock is adding to concern over the economic outlook after recent signs of a possible slowdown.
Catching Up
Italian stocks have been catching up with the rest of Europe since last year, also outperforming in 2017. Banks led the rally as the country’s lenders successfully started the process of disposing non-performing loans. UniCredit SpA and Intesa Sanpaolo (MI:ISP) SpA, Italy’s biggest banks, rose 17 percent and 15 percent this year, respectively. Stocks traded in Milan also remain among the cheapest in major European markets, with the FTSE MIB trading at about 13 times expected earnings in the next 12 months.
Signs of a potential macro slowdown in Europe seem to be temporary rather than structural, Batacchi said. “The euro/dollar exchange rate is the next trigger to monitor, together with quarterly results.”
Italian government bonds have also rallied since the election, pushing the yield premium over German bunds to the lowest since August 2016 as investors were prepared to overlook political turbulence to snap up higher-yielding debt. The yield on the country’s 10-year bonds fell 3 basis point to 1.77 percent on Tuesday.