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Italy: Still a favorite destination for Islamic investors (Part III)

Italy is getting ready for the general elections that are scheduled for next March. Prime Minister Paolo Gentiloni’s Democratic Party is trailing both a center-right coalition led by former prime minister Silvio Berlusconi and the anti-establishment Five Star Movement led by Luigi Di Maio.

It is hard to predict the outcome of the elections, but based on the current polls, and considering the new election law which was recently approved, it is likely that none of the three main electoral forces will have control of parliament after the vote.

Should this be the case, Sergio Mattarella, Italy’s president, could renew Gentiloni’s term to allow him to lead a government of national unity after the vote, quite similar in nature to the German CDU/ CSU-SPD Grosse Koalition.

This scenario would allow Italy to undergo a further period of political stability which would be highly beneficial to the recovering economy, and would allow GDP growth to consolidate further in the coming years.

It would appear that foreign investors are betting on this scenario if one considers, for example, that Monte dei Paschi di Siena, the world’s oldest bank which was rescued by the Italian government last year when it was on the verge of going bankrupt under the weight of a huge bulk of nonperforming loans, recently was not only able to raise EUR750 million (US$908.6 million) of 10-year Tier 2 bonds, but also saw the sale of its highly speculative triple-C rated bonds receiving orders for EUR2.5 billion (US$3.03 billion).

We have previously reported on preferred asset classes for foreign Islamic investors looking at Italy and have focused on real estate and debt but the issue that has grabbed most market headlines in recent months has been the sky-high level of equity prices. This time we will turn our attention to the equity market and in particular Islamic equity.

As already mentioned, the Italian stock exchange manages the so-called ELITE program which is aimed at helping fast-growing companies access the debt and equity capital markets. It currently includes some 430 Italian companies with high-growth potential, 183,000 employees and aggregate revenues of EUR46 billion (US$55.73 billion). It should be possible though appropriate screening to identify an Islamic ELITE basket which would include all those companies out of the ELITE program which meets Shariah criteria, ie not involved in non-Shariah compliant activity. In particular, the applied screens could be similar to other Shariah compliant indices: business activity, ie excluding companies engaged in alcohol, tobacco, pork-related products, entertainment (casinos, gambling and pornography), weapons; conventional financial services, ie banking, insurance and so on; and biotechnology companies involved in human/animal genetic engineering) as well as a financial ratio screen with regards to debt, cash and interest-bearing assets, accounts receivables, etc.

Once the basket has been construed, Islamic investors could easily target the companies that are in the basket knowing that they are fast-growing and meet Shariah criteria.




This article was first published in Islamic Finance news Volume 15 Issue 3 dated the 17th January 2018.

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