Italy: do investors think the country has been “screwed”?

What better way to while away three hours on a congested train than with a special report by The Economist on the plight of Italy. I fancy this week’s headline has boosted circulation more than a tad. Above a picture of a grinning Silvio Berlusconi is the line: “The man who screwed an entire country.” We will look at short selling in Italy from a macro and micro perspective to see that there is indeed plenty of investor pessimism. We will feature Banca Popolare di Milano (BIT:PMI), UBI Banca (BIT:UBI), Banca Monte Dei Paschi (BIT:BMPS), Fiat (BIT:F), Fondiaria (BIT:SA), Kerself (BIT:KRS) and Buzzi Unicem (BIT:BZU).

‘Japan of Europe’

If the statisticians are to be believed and this isn’t the full story, some of the alarming facts include these: Each quarter percent rate rise by the ECB depresses Italian GDP by 1%. This is quite sobering, given that ECB governor Jean-Claude Trichet has warned of a rise next time - especially since Italy ranks at position number 167 out of 179 countries ranked in order of GDP growth in the report. As such, The Economist describes it as the “Japan of Europe.”

LongShort Ratio

According to this macro measure of investor confidence, Japan is in a better place than Italy. The Data Explorers ratio of supply of equities to demand to borrow them, when rebased, shows relatively more borrowing in Italy than Japan since April this year. This is driven by a rise in stock on loan rather than a fall in the value of the Italian equities in lending programs. This must be in anticipation of worse times to come since Italy’s shares are actually up 0.5% year to date in Euro terms and up 9.4% in US Dollar terms.

For a further comparison, we looked at Italy relative to Hong Kong given this market is down 1.6% year to date and features plenty of recent short selling momentum. Again, Italy comes worse off in a rebased comparison of the Long Short Ratio after this ratio plunged since March. These investors could be wrong, but they have clearly set their sails in anticipation of ill winds towards Italian equities.

Italian Banks

Much of the short selling action is taking place in Italy’s banks. The average for short selling is 3.7% of all shares against 1.7% for all western European banks, according to Bloomberg’s RV screen (see below) and 1.2% for over 300 Italian companies. One of Milan’s main banks, Banca Popolare di Milano (PMI) has seen its share price fall almost 50% in three months. Short selling is at a record high of 3.4% of all shares, with almost all the shares that are available to be borrowed out on loan. Demand to borrow is strong in UBI Banca and Banca Monte Dei Paschi as well.

Top shorts

Elsewhere, Fondiaria, Kerself and Buzzia Unicem are high on the list of most shorted shares with over 6% of all shares on loan, and we also see more than a little short selling in Fiat. Exporting cars is a strong point for the Italian economy, but contrary to popular perception, Italy makes and exports less than we do in the UK, according to The Economist. Demand to borrow Fiat trebled at the beginning of this year and has stayed high at over 6% of all shares. Funds who lend are also negative on Fiat’s outlook, having reduced their holdings from 135m shares in December to 110m now or 10% of the company.
 

It is not just the front cover of The Economist that makes you laugh. If you read on you find this phrase: “in New York it is rare to find a taxi driver born in America. In Milan, Italy’s biggest and most dynamic city, it is rare to find a taxi.” To some this is quaint, to others this is a worrying sign and they have invested accordingly.