Most of the attention on innovative disruption rightly focuses on the “Disruptors”. They are the ones driving change, after all. Today’s news regarding Italy reminds us of the investment ramifications of being over weighted the “Disrupted” – old-line companies that remain the targets of innovation.
A few facts about the Italian equity market tells the story:
The FTSE MIB Index (40 names) has exactly one Technology company – STMicroelectronics – with just a 3.3% weighting. While STM has tripled in the last 5 years, it is still more than 50% off its late 1990s highs.
The rest of the FTSE MIB Index is as old-world as a Neapolitan pizza:
- 28% weighting in Banks
- 17% weighting in Utilities
- 11% in Oil/Gas
- 10% in Auto manufacturing
- 9% in Industrial Goods
- 8% in Insurance
- 17% in everything else
The MSCI Italy Index (30 names), used in the iShares Italy ETF, has even less Tech exposure:
- STMicroelectronics is in the MSCI France Index, not Italy, since it has a dual-country structure.
- That leaves the Italy Index with no Tech exposure at all.
- The largest industry weights here are Financials (33%), Utilities (18%), Energy (15%) and Consumer Cyclicals (14%)
So what happens to equity investors when Technology and disruption play such a small role in a national economy and stock market? A few pointers:
- The all time high for the FTSE MIB Index was almost two decades ago (January 2000) and at levels (48, 479) more than twice today’s.
- The MSCI Italy Index is only up 8% over the last 5 years in price terms, lagging both the MSCI EAFE Index (+14%) and the S&P 500 (+63%). And yes, the EAFE Index (western Europe and Japan) suffer the same lack of disruption in their ranks – hence the dramatic underperformance to US equities.
Bottom line: Italy is a cautionary tale for equity investors, highlighting what happens when societies fail to innovate. Financial system credit quality aside, there’s nothing inherently wrong with Italian equities. There’s just nothing inherently “right” either.