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LONDON, Feb. 17 (Reuters) – Mario Draghi’s appointment as prime minister of Italy will provide a big boost to the country’s financial markets, Morgan Stanley said on Wednesday, predicting a big increase in the spread of closely watched sovereign bonds and double-digit performance. by its stock market.
Draghi, a former head of the European Central Bank who feasted on the Italian media as a national savior, pledged sweeping reforms to help rebuild Italy in a speech to the Senate on Wednesday ahead of a mandatory vote of confidence in his national unity government.
Morgan Stanley said the halo effect would narrow the BTP bond spread – a premium investor demand for holding Italian government bonds rather than AAA rated German debt – to 85 basis points in June from the current 90 bps spread. In the optimistic case it could drop to 55 bps before the end of the year.
For stocks, the bank expects Italy’s MSCI index to outperform MSCI EMU by 10-15% led by banks. Stocks with an overweight rating include: Unicredit, Mediobanca, ENEL, Stellantis and Prysmian.
“PM Draghi’s government is a significant positive catalyst for Italian equities, which are trading near record low valuations versus EMU,” said Morgan Stanley analysts.
The long-suffering European banking sector could do better.
Increasing perceptions around Italy could be matched by the expected economic recovery from the COVID-19 pandemic, Morgan Stanley said, adding that a performance of more than 30% was “absurd”.
The MSCI European stock index is currently trading at a discount to the World Index of All Countries excluding the United States for the first time since 2013.
“Draghi’s appointment could spark renewed interest in the region from global investors, as was the case around (Emmanuel) Macron’s election victory in France in 2017,” said Morgan Stanley.
Reporting by Marc Jones; Edited by Tom Arnold and Gareth Jones