Italy: As sales rise and inflation stays low, can stocks extend rally?

People walk around in a shop in the heart of Milan, Italy, during the January sales
People walk around in a shop in the heart of Milan, Italy, during the January sales Copyright Claudio Furlan/LaPresse
By Piero Cingari
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Italy's retail sales climbed by 1% in January, while inflation remained well contained at 0.8% in February. The FTSE Mib index has seen five consecutive months of gains, but overbought conditions emerge.

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Latest data for the Italian economy unveiled an unexpectedly robust surge in retail sales for January, coupled with a sustained low inflation rate throughout February.

Italy's retail sales surged by 1% in January 2024 compared to the previous month, marking the highest monthly growth rate in the past year and surpassing estimates of a 0.2% increase. However, the yearly variation showed a slight decrease of 0.1%, attributed to similarly strong numbers in January 2023.

In terms of inflation, the ISTAT confirmed a year-on-year increase of 0.8% in February, consistent with January figures. Monthly price pressures saw a slight uptick of 0.1%, unchanged from earlier estimates, marking a deceleration from the 0.3% observed in January. The harmonised inflation index, which allows for comparison across euro area countries, was revised downward to 0.8% from 0.9% annually and to 0% from 0.1% monthly.

Overall, inflation in Italy remains notably subdued, well below the euro area average of 2.6% and the second lowest only to Latvia's 0.7% year-on-year surge in February.

So far, declining price pressures have had a positive impact on the economy, with consumers showing sustained demand amid higher real incomes. However, it remains to be seen whether the continued drop in price pressures might reveal a more structural deceleration of the economy in the coming months.

Current indicators suggest expansion in the Italian services sector, with Services PMI rising from 51.2 in January to 52.2 in February. Manufacturing activity, assessed by the Manufacturing PMI, experienced a very marginal contraction at 49.1, the least pronounced over the past 11 months.

Does this signal further growth for the FTSE Mib index?

The Italian FTSE Mib index, measuring the performance of the 40 most capitalised stocks listed on the Borsa Italiana, has experienced a remarkable streak of five consecutive months and eight consecutive weeks of gains. The latter represents the longest winning streak since April 2009.

Italian stocks have risen by 33% since a year ago, and have recovered levels last seen in April 2008.

However, technical indicators used to gauge the strength of the price momentum, notably the Relative Strength Index, suggest sharply overbought conditions across daily, weekly, and monthly timeframes for the FTSE Mib index, suggesting caution may be warranted here.

From a foundational standpoint, the spread between Italian BTP yields and Bunds remains relatively contained at 125 basis points, significantly lower than the peaks seen in 2023 at 200 basis points and in 2022 at 250 basis points. This situation fosters a favourable atmosphere for Italian equities.

Additionally, the Italian stock market currently exhibits a price-to-earnings ratio below 10, contrasting with the three-year average of 13. Furthermore, the price-to-sales ratio is below 1, indicating that despite the robust rally, Italian equities remain reasonably priced. In contrast, the U.S. S&P 500 index trades at 21 times its earnings and 2.7 times its sales.

To sum up, while technical indicators suggest that Italian stocks might slow down after a rapid and substantial rally in recent weeks, maintaining or improving economic fundamentals could sustain Italian equities as an appealing opportunity for investors.

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