Italian Equity Market: Top Picks for 2H23 - Cheap or a Value Trap?

The Italian stock market trades at a deep discount on 2023 and 2024 earnings, and the discount is even larger for the FTSE MIB benchmark index. However, the 2023-2024 earnings growth trend remains weak and offers little support for a significant decrease in the discount.

In essence, it was the interest rate hikes, not the weakness of earnings, the main reason for Italy's protracted phase of multiples decline in 2022, according to our analysis. In the absence of a strong recovery in profitability in 2023-2024, we believe that a new round of multiples expansion will only take place when investors begin to factor in the start of a phase of interest rate decline in the euro area.

With regard to corporate earnings, consensus forecasts for 2023 and 2024 see earnings nearly flat at 2022 levels, and the trend in earnings revisions has weakened over the past 12 months. Expected growth for 2023 is equal to +3%. Furthermore, based on our analysis, market prices appear to incorporate a slight decline in earnings this year by approximately -5%, offering partial protection against any downward revisions of estimates. We are, however, less confident about a significant rebound in earnings growth in 2024. We expect GDP in Italy to grow by +1.2% in 2023 (a slowdown after the +3.8% recorded in 2022), and to maintain a similar growth rate in 2024 at +1.3%. The recession expected at the beginning of 2023 has therefore not materialised until today.

SOURCE Intesa Sanpaolo Research elaborations