The 19% rally in Italian stocks this year has left them exposed to sovereign debt risks as bond yields climb, according to Goldman Sachs Group Inc. strategists.
(Bloomberg) — The 19% rally in Italian stocks this year has left them exposed to sovereign debt risks as bond yields climb, according to Goldman Sachs Group Inc. strategists.
The team led by Sharon Bell said it expects the spread between Italian 10-year bond yields and those on benchmark German debt to widen further — although more gradually than in recent weeks — as the market re-assesses fiscal risks.
For every 10-basis-point rise in the spread, the strategists estimate a decline of 2% in shares of Italian banks, 1.5% in Milan’s FTSE MIB Index and 80 basis points in European stocks, based on relative moves since 2014, they wrote in a note.
Italian equities have outperformed regional peers by far in 2023 as the surge in bond yields improved the outlook for the country’s financials-heavy benchmark index. But the march higher in rates has also increased government debt costs, and any further spike risks adding pressure on the economy as about 30% of Italian debt is held in the domestic financial system, Bell said.
“After a strong outperformance, we would avoid the FTSE MIB” as it’s “vulnerable to higher yields, wider spreads and any worsening in growth outcomes,” the strategist said.
With its public debt standing at over 140% of gross domestic product, Italy is the second-largest sovereign issuer behind the UK. Moody’s Investors Service currently assesses Italy at Baa3, just one notch above junk, with a negative outlook.
Bell said she prefers the UK’s FTSE 100 index as it has a similar dividend and free-cash-flow yield to Italian stocks, but with less sovereign risk. She said Goldman’s asset allocation team suggests adding put options on the FTSE MIB as a way to hedge the public debt risk.
–With assistance from Michael Msika.
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