A man wears a protective mask while sitting near the Colosseum as the spread of the coronavirus disease (COVID-19) continues, in Rome, Italy, November 12, 2020.
Guglielmo Mangiapane | Reuters
LONDON – Mario Draghi’s new government could be good for the financial situation and consumer recovery, an analyst told CNBC as investors become more optimistic about Italian stocks.
The former chief of the European Central Bank has ambitious plans to reform the country, including Italy’s judiciary, public administration and tax system – an agenda welcomed by market players who have been hesitant about Italy, as multiple governments have seen in recent years. have struggled to implement meaningful reforms.
“Implementing structural reforms will be difficult. But after a long period of underperformance in Italy, expectations are low. according to investment research analysts. Gavekal Research firm said in a note.
The FTSE MIB, Italy’s main stock market index, is up about 7% from a January 29 low as a result of Draghi’s appointment. But experts believe there is even more room to grow.
UniCredit strategists predicted last week that large and medium segments of the Italian market could have “an absolute performance potential of about 10% from current levels” in 2021.
Shifting the tax burden of the labor force by lowering income taxes and employer social security contributions would lower labor costs and boost business productivity.
Italy has taken steps to support businesses and citizens in the aftermath of the Covid crisis, including through tax deferments. However, it will also benefit from more than 200 billion euros ($ 243 billion) in European funds, which will start coming in later this year.
Financial shares
Mislav Matejka, head of global and European equity strategy at JPMorgan, said Draghi’s policy is “optimistic for the Italian stock market, due to tighter spreads in the peripheral countries, increased credibility of the policy and the trough in activity dynamics, aided by the strong fiscal support. “
“At a sector level, this is especially positive for financial institutions, but also for consumer recovery,” said Matejka.
Financial services are the largest sector among Italian large and mid-cap companies, and consumer goods are the third largest.
Draghi, who was called to take over the leadership of the country after a political crisis erupted in January, told lawmakers he will be dealing with some issues “that have been open for decades.”
Analysts are particularly optimistic about possible changes in the tax system.
“Shifting the workforce’s tax burden by lowering income taxes and employer social security contributions would lower labor costs and boost company productivity,” said Gavekal analysts.
Draghi has also pledged to use upcoming European funds to focus on digitization, retraining and to accelerate plans for the country to switch from fossil fuels.
“This reform agenda will find its counterpart in the selection of investment projects related to the EU-wide facilities,” said Marco Protopapa, economist at JPMorgan.
Last year, Draghi emphasized the importance of the Recovery Fund resources for Italy by distinguishing between good debt, coupled with targeted, productivity-enhancing spending in the form of investments with high social returns, and bad debt due to fragmented policy measures. , ”Said Protopapa.