We highlighted Italy as an opportunity last summer, when the FTSE MIB was trading at around 13,500.
For anyone who bought, it's been an exciting ride. The market got as high as 18,000, then took a pummelling, sliding to nearly 15,000, when the Italian elections left the country without a leader.
Since then, the leadership void has been filled however temporarily by new prime minister Enrico Latta, and the market has recovered. It's now closer to 17,000.
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Italy is by no means fixed. There are lots of reasons to worry about the economy. But we'd stick with it.
Italy has plenty of problems
The Italian economy has a lot of problems. It's never been the most dynamic economy, nor has it ever been a shining example of democracy at its best.
It has a huge accumulated government debt - national debt, as a proportion of GDP, comes to around 130%. While academics might be sniping at one another about precisely just how much government debt is too much', 130% is undoubtedly a very big number.
And its politics are messy. Letta, the new prime minister, is the head of an uncomfortable coalition of both left and right-wing parties. It was cobbled together largely to keep out the anti-establishment Five Star Movement.
As one of Italy's MPs told the FT: "The real dynamic now is not between left and right but between politics and anti-politics, between demagoguery and political realism." That's hardly a recipe for stability and unity.
Hanging over all this, of course, is the eurozone crisis, and the threat of Italy either leaving or being kicked out of the eurozone. Letta is talking about easing up on the pace of austerity measures'. But at the same time, the country desperately needs reform to continue. Between 2000 and 2011, Italy was the only OECD country where GDP per head actually fell "because of poor competitiveness", reports the FT.
So why would we still buy Italy?
There are a few bright points about the country. For one thing, despite its huge past debts, Italy's current spending picture is actually pretty good by European standards. It runs a deficit (annual overspend) of less than 3% of GDP. And most of that is paying interest on the debt it has already racked up. So its debt picture, while bad, is not completely dire.
Perhaps more to the point, Italy defines too big to fail' in Europe. As we've noted before, the Germans and the European Central Bank can't ignore Italy. A threat to kick Greece or Cyprus or Portugal (if it came to it) out of the eurozone has credibility. A threat to do the same to Italy would be asking for disaster.
So if the situation in Italy deteriorates, it's Europe's problem, one way or the other. That suggests that the country won't be allowed to go bust.
The real reason to buy Italy it's cheap
But there's a more fundamental attraction. As a wise man once put it: "There's no such thing as toxic assets only toxic prices." The fact is that sometimes a market is cheap enough that all of its problems don't matter, because they're in the price.
For me, this is the key to contrarian investing. Everyone in this business is a contrarian. I've yet to meet a fund manager who doesn't describe their investment style as contrarian'. Half the time, I'll then check their fund fact sheet and note that the top ten holdings are a virtually perfect mirror of the top ten biggest companies in the FTSE 100.
The only proof that you are investing in a contrarian idea is that the valuation is at an extreme. It's either extremely cheap (if you're a buyer) or it's extremely expensive (if you're a seller). If an asset is reasonably priced, then chances are, your view just isn't contrarian.
Don't just take my word for it. Dr Steve Sjuggerud is a contrarian US newsletter writer. In the latest issue of his Daily Wealth newsletter he notes that "the right time to buy an investment is when it's cheap and hated but when a new uptrend is in place.
"Italy offers all that, right now."
Italy's price-to-book ratio is around 0.77, notes Steve. Broadly speaking, book value gives you an idea of how much a company or market's underlying assets are worth. It's a rough measure of course you don't truly know how much anything is worth until you try to sell it.
But to put that into some perspective, notes Sjuggerud, the US trades on a price-to-book of around 2.3. Even Spain, another troubled eurozone market, is on around 1.2.
And, he adds, Italian stocks have only been this cheap in late 1992, and in early 2009. On both occasions, stocks went on to soar. From 1992, stocks had more than doubled 19 months later. From 2009, stocks rose by 45% in seven months.
So now that it's heading higher, Sjuggerud has decided it's time to get on board. And he's hardly a mainstream pundit. If he's only just cottoning on to the trend, then it's likely that there is plenty of scope for further gains.
In short, I'd stick with Italy. And if you've not bought in yet, I don't think it's too late to do so. The easiest way in for a British investor is via the iShares FTSE MIB exchange-traded fund (LSE: IMIB). I own shares in the ETF.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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