'Winter is Coming'... Italy Emerges as a Crisis Trigger

Eurozone Faces Persistent High Inflation
Rising Price Pressure Due to Russia's Energy Weaponization
Italy Expected to Suffer the Most
Russia's Natural Gas Dependence Higher Than EU

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] Italy is being identified as the biggest victim of Russia's energy weaponization policy amid the sharp inflation surge in the Eurozone.

Min Byung-gyu, a researcher at Yuanta Securities, stated, "Italy appears to be a potential flashpoint of crisis in Europe," adding, "Concerns over political instability, such as Prime Minister Draghi's recent resignation announcement, have led to a rapid widening of the interest rate spread compared to Germany and other vulnerable countries."

Currently, the prevailing sentiment in Europe is that high inflation will persist. Last week, the European Commission raised its 2022 inflation forecast for the Eurozone to 7.6%. This means the average Consumer Price Index (CPI) is expected to rise from 7.1% in the first half of the year to 8.1% in the second half.

Researcher Min pointed out, "The European administration's upward revision of inflation forecasts reflects the calculation that price stabilization will take considerable time due to Russia's recent energy weaponization policy," noting, "The TTF, the regional natural gas benchmark in Europe, surged an additional 25.9% over the past month."

Accordingly, Germany's June CPI rose by 7.6% year-on-year, and the Producer Price Index (PPI) increased by 32.7%. The inflation spread (-25.1%) suggests that margin pressures on German companies have reached the highest level since statistics began being compiled.

Min said, "Germany's 2022 earnings per share (EPS) growth forecast has been downgraded from 8.9% before the Russia-Ukraine conflict to 6.6% currently," while "During the same period, the global EPS forecast rose from 8.2% to 11.3%."

[Image source=Yonhap News]

Researcher Min stated, "Italy is expected to suffer the most damage if Russia cuts off natural gas supplies."

He added, "On the 19th, the International Monetary Fund (IMF) estimated that if supply cuts materialize, Italy's economic growth rate could decline by up to -5.7% over the next year," comparing this to the European Union's (EU) estimate of -2.7%.

[Image source=Yonhap News]

Italy is also reportedly struggling to secure natural gas inventories.

Researcher Min explained, "Italy's 'natural gas storage capacity utilization rate' stands at 58%, the lowest among major European countries." Italy depends on Russia for 43.3% of its natural gas imports, which is higher than the EU average of 38.7%.

According to MSCI standards, Italy's stock market 12-month forward price-to-earnings ratio (12MF PER) has fallen to 7.5 times, and the price-to-book ratio (PBR) to 1.0 times, about a 50% discount compared to the five-year average.

Researcher Min pointed out, "A noteworthy comparison for domestic investors is that the valuations of Italy and South Korea, where the risk of systemic crisis has increased, are at similar levels (South Korea PER 8.2 times, PBR 0.9 times)," adding, "Another emerging market country with similar levels is Chile (PER 8.3 times, PBR 0.9 times)."

This content was produced with the assistance of AI translation services.