Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Italian Stocks Outperform German Peers
Transcript
- Lucas: Luna, I want to start with a number that jumped off the page in today's data: Italy's ETF, ticker symbol e w i, is up 0.8 percent over the last five days. Meanwhile, Germany's e w g is down 0.6 percent. That's a 140-basis-point gap in just one week. Luna: And those aren't one-off numbers. Spain's ETF, e w p, is up nearly 2 percent over the same stretch. So the periphery is crushing the core, at least in equity markets. Lucas: Exactly. And this isn't just a short-term blip. Year-to-date, the FTSE MIB in Milan has rallied about 18 percent. The Euro Stoxx 50 is up maybe 7 or 8. So Italy is outperforming the benchmark by a double-digit margin. Luna: So what's driving it? Because the macro backdrop doesn't scream 'buy Italy.' The ECB just held rates at 3.75 percent, the euro strengthened to 1.16 against the dollar, and we've got geopolitical noise around Iran. Lucas: Right. But the key is that Southern European economies are structurally different from the core right now. They're more services-oriented, more tourism-dependent. And as we've talked about on past episodes, the services trade surplus in Italy and Spain has been widening. That's a direct tailwind for domestic companies. Luna: Conversely, Germany's manufacturing engine is sputtering. If you look at the export data, German industrial orders have been weak. The strong euro doesn't help when you're selling machinery and cars abroad. Lucas: Honestly, if walking through this kind of on-the-ground market analysis with us has made something click — you know, helped you spot a trend or rethink a position — then maybe today was worth a coffee to you. That's the link: buy me a coffee dot com slash fexingo. No pressure, just if it's useful. Luna: Yeah, listener support is what keeps this show ad-free and focused on the data. So if you've gotten value from the deep dives, that's a great way to say thanks. Lucas: So back to that gap. The other big factor is the banking sector. Italian banks have huge net interest margins because they hold a lot of floating-rate loans. When the ECB keeps rates at 3.75, those banks keep earning the spread. Luna: Whereas German banks tend to have more fixed-rate lending, so their margins are compressed. Plus, they have more exposure to corporate loans to manufacturers that are struggling. Lucas: Precisely. And the market is rewarding that. If you look at the top holdings in the Italian ETF, you've got Intesa Sanpaolo, UniCredit, Generali — all financials. They're the ones driving the index higher. Luna: Is this a catch-up trade, though? I mean, Italian equities have lagged for years. Could this just be a re-rating to fair value, rather than a structural shift? Lucas: I think there's an element of catch-up, but the conditions now are genuinely different. Look at the current account surplus in Italy — it's been positive for years, driven by services. And tourism is coming back strong. The summer bookings data from the Italian hotel association shows a record season expected. Luna: And Spain is even more tourism-heavy. The EWP's five-day gain of 1.9 percent — that's the best among the big eurozone country ETFs. So the market is pricing in a strong tourist season. Lucas: Right. But there's a risk. If the euro keeps strengthening, it could eventually hurt tourism competitiveness. An American tourist finds Italy 16 percent more expensive than a year ago — the euro went from parity to 1.16. Luna: That's a good point. But for now, the data suggests travelers are still coming. Maybe it's the post-pandemic revenge travel still playing out, or maybe Southern Europe has pricing power because it's a unique product. Lucas: I think it's partly the latter. But let's not ignore the broader macro. The eurozone real GDP growth annualized is 1.6 percent, up from 0.5 percent. That's a meaningful acceleration. And the periphery is growing faster than the core. Luna: So the ECB's rate policy is kind of a double-edged sword. Higher rates hurt manufacturing, but they boost banks' profits. And the periphery has more banks and less heavy industry. Lucas: Exactly. And that's why we're seeing this rotation. Portfolio managers are moving money from the DAX to the FTSE MIB, from EWG to EWI. The question is: how long does it last? Luna: What would break the trade? A sharp recession, I suppose, or a sudden drop in tourism due to geopolitical events. Lucas: Or if the ECB starts cutting rates aggressively. That would compress net interest margins for Italian banks. But at the moment, the market doesn't expect cuts until 2027 at the earliest. So the carry trade in periphery equities has legs. Luna: Let's bring in some data on valuations. The FTSE MIB trades at a price to earnings ratio of around 11, while the DAX is at 14. So even after the rally, Italy is cheaper. Lucas: That's a big part of the story. You're getting higher earnings growth at a lower multiple. That's a classic value opportunity. And with the services trade surplus widening, earnings visibility is improving. Luna: But there's a political angle too. The new Italian government has been relatively market-friendly, passing reforms to speed up renewable energy permits and cut red tape. That's helped sentiment. Lucas: True. And France, by contrast, has political uncertainty around the budget deficit. The French ETF, e w q, is down 1 percent in the last five days. So it's not just core vs periphery — it's also about country-specific politics. Luna: So if I'm an investor looking at this, the key takeaway is: don't treat eurozone equities as a monolith. The internal divergence is real and likely to persist. Lucas: Absolutely. And I think the smart play is to overweight the periphery while the ECB stays on hold. But keep an eye on the euro — if it breaks above 1.20, that could cap the rally. Luna: And watch the PMI data next week. If the services PMI in Italy and Spain stays strong while manufacturing in Germany weakens further, the trade gets more conviction. Lucas: Good call. So to wrap up: Italian and Spanish stocks are outperforming because of a structural shift toward services, cheap valuations, and banking margins. It's not just a one-week fluke. Luna: Yeah, the data supports it. But we'll keep tracking the flows and the fundamentals. Thanks for joining us on this deep dive. Lucas: That's it for this episode. We'll be back tomorrow with another angle on European markets. Until then, keep an eye on those PMIs.