EWI Gives Some Decent Financials And Utility Exposures – Seeking Alpha
The iShares MSCI Italy ETF (NYSEARCA:EWI) gives you exposure to the typical components of the Italian economy. Some elements are resilient even in a recessionary environment, and others have some other value angles that make them attractive. However, there are also more vulnerable exposures. While the yield is nice and the multiples reflect some of the uncertainty, we don’t feel strongly that this is a good addition to an ETF portfolio.
It helps to start with a sector breakdown. Most of the ETF is allocated into financials, which include large Italian banks but also major insurance houses. The story with Italian banks over the last decade has been related to NPLs and how banks were managing them. At this point, solvency risks are in line with the rest of the banking world, with a lot of the debt being to the sovereign. Italian people actually save a lot of money, so households aren’t so leveraged. Both Italian banks and insurance houses are relatively well positioned for a rate increasing environment for the obvious reason that their business models depend in part on yields from rates. For the most part, we don’t expect too much delta on loan growth due to high private savings rates persisting over time. Moreover, these institutions typically have large real estate assets that don’t get incorporated into the equity bridge. In cases like with Intesa Sanpaolo (OTCPK:ISNPY) the real estate portfolio is likely to eclipse its market value. This is a nice and defensive element.
Besides financials there are utilities. Here the chief exposure is Enel SpA (OTCPK:ENLAY), which is a massive utility conglomerate. Within it are emerging market exposures as well, but across geographies are a focus on renewable power generation, a large retail franchise that is integrated with it, and quite a few regulated utility concessions in different geographies but also including Italy. In addition to Enel there is Terna (OTCPK:TERRF) which operates the transmission concession in Italy. In general we are overweight regulated utility exposures due to their favorable characteristics in the current environment. The first is that regulated WACCs do adjust for things like rates and inflation, and in general the regulated WACCs define a guaranteed remuneration for operators on their assets. It is rate for the operators to change unless there is some sort of scandal, as was the case with Atlantia (OTCPK:ATASF), which still overall performed well due to its other affiliate income, and even managed to sell the Italian motorway concession at a good price despite having been responsible for the collapse of the most major bridge in Genoa that killed dozens of people.
The areas where we have more concern are in the consumer discretionary bucket. Stellantis (STLA) created some concerns along with Ferrari (RACE). Together these account for 15% of the ETF. With a recession coming spending on durables could substantially fall as it is a leveraged consumption. RACE is probably less exposed than Stellantis but we don’t love the exposure to either. In general the automotive exposures in Italy do add up and it creates some concern.
The yield is at 3.67% which is attractive. The earnings yield is just above 10% thanks to a generally low multiple …….