Some of our clients have been wondering why we recently bought shares in EWI – the iShares MSCI Italy Index ETF – for our Dynamic Moderate, Dynamic Appreciation, and Dynamic Ultra Appreciation models. It’s a good question, and we put a lot of thought into that decision.
Here are our reasons for the purchase:
- The European Central Bank has stated that it will buy bonds to help stabilize the Italian bond market. Thus, we do not think that Italy and Italian companies will fall into the abyss even though its companies have sold off dramatically.
- The Italian market is priced at a near-depression level. The actual data is that Italy is trading at a normalized Price/earnings (P/E) of 7.2, versus a historical median of 23.1. Also, Italy’s benchmark stock index recently re-tested the panic low it hit in March 2009, which was about -70% off its high. (See the charts on the right.)
- We think a lot of the current problems are sufficiently discounted in Italian company earnings, and Italy could stand to benefit disproportionally if there are even tentative signs of the smoke clearing there and in Europe.
- As far as overall portfolio allocation and volatility, our portfolios have had (and still have) a small allocation to Europe. This position can obviously be volatile, so we sold another volatile holding (technology) to fund this purchase. In other words, we did not fund this purchase with cash, but merely exchanged risk for risk.
Despite Italy’s well-publicized problems, we believe there’s a good opportunity now to take advantage of the Italian stock market’s near-depression level price.