Italian Market Not At Bottom

FTSE MIG YE 03.28.2013Why Italy Looks Cheap – WSJ.com.

This guy wants you to invest in the Italian stock market.  He is correct that investors should buy assets when they are cheap.  The major Italian market index, the MIB, has underperformed Europe by about 10% this year. The forward-looking PE of the MIB is a very low 11, which is very cheap considering the rest of the world is over 15.

There are a couple of holes in his narrative.  The Italian market is not historically cheap.  As the chart above tells us, the market could fall further and still not hit its all-time low.  More importantly, that forward-looking PE is not as low as it looks.  Forecasts for Italian companies must be revised downward in order to take into account the ongoing Eurozone and Italian recessions.  Once that is accomplished, that 11 looks more like a number in the teens.

In my opinion, Italy still has a ways to fall before it becomes a bargain.

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