It’s no secret that the euro-zone has been the center of market turmoil for the past few weeks as well as a lingering issue for the past year. The thorn in investors’ side comes from a slew of fiscal issues that have already led to one unsuccessful bailout, prompting another austerity package that has yet to be put in place. At the head of it all has been Greece, who has been the guinea pig of the failing euro zone. There were once talks of nixing them from the currency bloc altogether, or that more powerful nations would flee back to their original currencies. But now that Greece is staying on the euro and is headed for a major shift in their governing members, the limelight has been turned to Italy [see also Euro Free Europe Portfolio Now Available].
The Italian Job
Italy has always been a problem nation in this recent crisis, along with Portugal and Spain, but the past few days have put up a number of red flags for the Italian economy. Yesterday saw the news that the nation’s Premier, Silvio Berlusconi, will be stepping down once the austerity measures are passed, prompting a short buying trend in foreign markets; many felt that Berlusconi was one of the reasons that Italy was faced with a political deadlock. Though markets rallied on the news, it was short-lived, as Italian ten-year yields soared above 7%, a dangerously unsustainable figure. “Greece, Ireland and Portugal were forced to take bailouts when their ten-year borrowing rates rose and remained above 7 percent” writes Pan Pylas.
Most European indexes were slaughtered yesterday, with the FTSE 100 dipping nearly 2.5%. This was coupled with a dismal day for nearly all asset classes in the U.S. has a number of investors fearful. Italy, the world’s 8th largest economy, is faced with a debt pile amounting to $2.6 trillion, far more than the rest of the continent is able to handle. It has become abundantly clear that there is no quick fix for Europe’s issues, but according to British Deputy Prime Minister Nick Clegg, “the choice is stark: Reform or wither. Reform now or regret it forever” [see also Three Long/Short Ideas For Euro Zone Debt Drama].
Amid all of the volatility in markets, investors have a wealth of opportunities, short or long, to add to their portfolios. But no matter what asset class or region you wish to establish a position in, one thing is certain, investors need to adapt for the possibility of a worsened euro crisis and one fund in particular makes for an interesting play.
MSCI Italy Index Fund (EWI)
This ETF is designed to measure the Italian equity market and features a large cap structure. The fund, unfortunately, has nearly one third of its assets in financials, which will certainly have major affect on its performance. In early trading yesterday, EWI dipped as much as 9.2%, as investors were easily spooked from this volatile fund. The ETF, though currently paying out a yield of 2.2%, has lost over 15% in 2011 [see also ETF Insider: It’s All Greek To Me].
With the Italian crisis quickly ramping up, a short position in EWI could yield massive returns in the short and even the medium term. But there is also an opportunity for investors to buy in at a low. Over the next few days and weeks, this ETF will likely see its price slaughtered as the country scrambles to stabilize their future, but once the dust settles, EWI may be sitting at an enticingly low position. No matter how you feel about the Italian economy and its future, this product presents one of the best ways for you to make a direct investment in a risky, but potentially rewarding, country [see EWI's detailed returns here].
Disclosure: No positions at time of writing.