Valerio Baselli: After some back and forth which unsettled financial markets last week, Italy has, finally, a new government. Supported by a coalition of the Five Star Movement and the League, Giuseppe Conte was sworn in as the new prime minister. The political events in Italy were the main driver for financial markets the last two weeks. The formation of the new government (the 65th in the last 70 years) avoided new elections for the time being, but markets failed to recover completely, and we'll continue to pay close attention to future developments.
While markets may remain volatile, the macro environment that Italy is facing is much more positive than the one during the euro sovereign debt crisis in 2011, and in our view Italy's membership in the euro should not be a concern for investors. The new finance minister, Giovanni Tria, said that no political force wants to exit the eurozone.
From the financial point of view, Italy's main problem is the high level of government debt, the third biggest one in the world. On the other hand, private sector debt is one of the lowest of the eurozone, and the Italian banking system soundness has increased. Mediobanca remains our most compelling idea within the Italian banks universe. We think it's undervalued by about 28%, as Morningstar equity research maintains the fair value estimate at 11 euros with no-moat rating.
Going forward, the level of volatility will continue to be influenced by the news flow and will probably stay high until some crucial issues, especially in terms of fiscal budget, become clearer. Morningstar analysts are closely monitoring what still is a fluid situation, but at the same time it's important to stress that we assess each strategy with a long-term mindset, and we believe investors shouldn't focus too much on the short-term noise and instead pay careful attention to fundamentals.
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