“Italy is the most overbought country in Europe,” stated Morgan Stanley analysts, adding that the recent outperformance is partially justified by fundamentals, considering that relative valuations “appear to be undemanding.”
Currently, European stocks are trading at a 45% discount compared to counterparts in the MSCI All-Country Index, marking a historical low.
Piazza Affari, the Italian stock exchange, stands out as the most popular in Europe when considering its relative performance over the past 12 months. This was emphasized by analysts at Morgan Stanley in their latest monthly note published on July 12. “Italy is the most overbought country in Europe,” stated the analysts led by Chelsea E. Tabe, noting that the recent outperformance is partially justified by fundamentals, and relative valuations “appear to be undemanding.”
This aspect should provide reassurance regarding the sustainability of the market’s recent uptrend in Italy. When considering the average premium compared to valuations of the European benchmark index (MSCI Europe), Italian equities appear to be the second cheapest after Austrian equities.
In summary, Piazza Affari is attracting investors, and based on fundamental analysis, it is not among the markets most exposed to the risk of a correction.
With a performance of around 19%, the FTSE MIB index was among the top performers in the first half of 2023, following only the Nasdaq and the Nikkei 225.
Not Just Milan, But Madrid Too
After Milan, the Spanish stock exchange has shown the most significant relative performance, indicating a change in investor sentiment towards the market. According to Morgan Stanley, the Spanish stock market has witnessed “some of the best upward revisions in earnings and dividends per share.” The country currently offers a 32% discount compared to the market when considering valuation metrics such as the price-to-earnings ratio.
Overall, the European market underperformed the global MSCI All-Country Index by 7% in the last quarter. However, corporate earnings have been “much more resilient,” leading to “a sharp decline in valuations according to various valuation metrics,” as observed by Morgan Stanley. European stocks are now trading at a 45% discount compared to counterparts in the MSCI All-Country Index, representing a historical low. Hedge funds, whose current exposure to the European market is at its highest since 2013, have likely taken this into account, as noted by Goldman Sachs.
The most overvalued markets currently (and therefore at higher risk of a downturn) are the Danish and Dutch markets.
Finally, the British and Belgian stock markets have exhibited the poorest relative performance over the past 12 months.
