Stock exchange, why the Italian stock market is undervalued (and perhaps does not deserve it)

Since the start of the year the Milan stock exchange has gained more than 16%, surpassing 35,000 points and returning to its highest level since May 2008. Pink jersey in Europe. Yet, despite the run, the Ftse Mib index remains the most undervalued in Europe: on average, share prices are 9.5 times the expected earnings in 12 months, against the European average of 14 (Eurostoxx index), the 21 of Wall Street (S&P 500) and the 27 of the Nasdaq.

Obviously no one thinks that the Milan stock exchange can (or should) ever reach US levels: our economy is decidedly less brilliant, our industry is completely different and there is a certain country-risk in Italy. But the question that needs to be asked is another: is that 9.5 times price-earnings ratio correct? In short: is Piazza Affari adequately valued by the market? Or can we call it undervalued? Are there margins for further rises?

While comparing the price/earnings ratio of one stock exchange with that of another is useless, because each list has different specificities and industrial sectors, it makes sense to compare the current level of each list with its own average of the last five years. According to Equita's elaborations, the European stock exchanges (Eurostoxx index) have a price-earnings ratio in line with the historical average: prices are 14 times the expected earnings in 12 months. The Old Continent, therefore, travels at average levels: nothing more, nothing less. The Wall Street stock exchange, on the other hand, is above average: the price-earnings ratio currently stands at 21 times, while the average over the past five years has been 19. This means that, perhaps, the Star and Stripes stock exchange has run a little too much. Or at least it has run a lot. On the other hand, Milan is below the historical average of the last five years, which is at 10.8: the current price/earnings ratio at 9.5 times is definitely below. This means that the Milan stock exchange, on the European scene, which already travels at a greater discount than that of the US, is - among the main stock exchanges - still the one with some potential compared to the average.

But is it true potential? Macroeconomic uncertainty is currently weighing on the Milan stock exchange, of course. But this weighs everywhere. Indeed, Italy has surprised to the upside several times in recent years. In Italy, the industrial sector is suffering in terms of profits, so much so that Equita itself has lowered its profit estimates for 2024: after a 2023 with a total profit of EUR 83.95 billion, this year it forecasts EUR 84 billion. Stable budgets then, and no longer growing (by around 5%) as Equita itself previously predicted. But does this justify such a high discount compared to the other European stock exchanges and compared to the same historical average of Piazza Affari? Probably not. For example, Equita's analysts point the finger at mid-caps in the Star segment (which have a p/e of 15 against a historical average of 17). But even banks have a low valuation: prices are 7.6 times earnings. And the industrials themselves, which travel at 6.2 times. In short: the Milan Stock Exchange is at the tail end of valuations, but perhaps it does not deserve this position.