A UniCredit Bank AG bank branch in Bucharest. UniCredit, Italy’s largest bank, is up 25 per cent, outperforming peers. Image Credit: Bloomberg

London: With all risk assets in green in 2019, the rally is showing no signs of fatigue.

Even Italy, a country that caused deep concerns for Europe last year, is now in a bull market. In fact, the FTSE MIB is by far the biggest gainer among main equity indexes in the region. It’s something to watch, with European elections around the corner and the recent budget standoff with the European Union.

The outperformance didn’t stop Citigroup’s quantitative model from ranking Italy as the most attractive equity market worldwide in a note this week. That said, the country’s score, based on 17 factors, has dipped to 1.1, against the three-month average of 1.4.

The country has benefited from a series of positive events, including some cracks in the coalition, easing tensions with Brussels over its budget, and an unchanged credit rating at Fitch in February. The bounce in its PMI data (purchasing managers’ index) was the cherry on the cake, fueling hopes that the current economic downturn will be short-lived.

Interestingly, the strong weighting of financials in the FTSE MIB (35 per cent), Europe’s highest after Spain’s IBEX, didn’t act as a drag this year. On the contrary, Italian lenders rebounded sharply after they were sold off in 2018.

UniCredit, Italy’s largest bank, is up 25 per cent, outperforming peers. It’s still an analyst’s favorite, with 88 per cent of buy ratings and no sells among the Bloomberg consensus. The bank has been in extra focus following a “Financial Times” report it is readying a bid for Commerzbank AG in case talks to merge the German lender with Deutsche Bank AG collapse.

By contrast, Ferrari, which has a 4.5 per cent weight in the index, has seen its stock soar 40 per cent this year and is trading above the average Bloomberg consensus price target. Overall, the country’s share price strength can’t be taken for granted.

Italian politics remain worrisome, and fundamentals are still weak, while the fiscal situation is fragile, Barclays strategists said in a note this week.

Even with easing budget-related tensions with the trading bloc, the country’s stance is unlikely to change, keeping anti-EU rhetoric during the election, while avoiding full confrontation, Barclays said. This may not mask Italy’s current problems as it grapples with weak economic activity, the highest debt-to-GDP ratio of the eurozone after Greece, while struggling to keep the budget on track.

Looking for southern Europe exposure, the strategists prefer Spain, where fundamentals are healthier.

Technically, signals are starting to look a bit stretched too. Within the market breadth of the FTSE MIB, 90 per cent and 68 per cent of stocks are trading above their 50-day and 200-day moving average, respectively. With 30 per cent of components in overbought territory, Italy has one of the highest proportion of overbought stocks in Europe.