My ancestors on my father’s side are from Italy. Tuscany. When I first visited the country in 2005, there was a chaotic feeling to it. After the smooth highways of France, you meander through Monaco and come across a small sign — ‘Italia’. You’ve crossed the border. The road is bumpier. The drivers crazier. The coffee better.
When I visited again in 2017, we were living in Europe, and it was this time I fell for the country’s charms. I was also a sandwich refugee. It’s the staple catered-lunch option in Britain. And foul when accompanied with bad coffee. Italy provides food, wine, scenery and genuine warmth — both in climate and people. Hard to match in this part of the world.
So, it was a shock last year when the Morandi Bridge, a section of road in Genoa I had driven, collapsed.
Photo source: The Guardian – AFP/Getty Images
It killed 43 people and left 600 homeless — as it became unsafe for apartment dwellers near the bridge to stay in their homes.
And it highlighted a big problem for Italy: the need to invest in aging infrastructure in an indebted nation.
The Belt and Road Initiative
So, when China came knocking with money this year, it got up the shackles of the US, France and other European nations.
President Xi has been peddling the Belt and Road Initiative. It’s China’s master plan to invest in infrastructure in China and around the world that will enable trade. And, as you may expect, the never-ending flow of Chinese exports.
With flagging economies and China Inc. sitting on mountains of cash, it’s jackpot time for many developing countries. But Italy?
Belt and Road is the 21st century Silk Road. Ports, railways, roads and bridges. Need to build one? If you’re a ‘qualifying country’, you could get access to cheap finance and Chinese construction expertise.
The trouble with infrastructure debt
Infrastructure can have a long payoff period. It’s better to fund it with equity. Debt, even at low rates, can leave you exposed. This is what happened to Sri Lanka in 2015.
The China Harbour Engineering Company, one of Beijing’s largest state-owned enterprises, had financed and built the brand spanking new Hambantota Port on one of the world’s busiest shipping lanes for the Sri Lankan government.
Unable to sustain the debt, Colombo tried to renegotiate the payment plan. China wanted equity. The upshot? With pressure from Beijing, the Sri Lankans handed over the port and 15,000 acres of land to the Chinese on a 99-year lease.
Rival India was less than happy. The transfer gave China strategic control of a key commercial and military gateway that’s a few hundred miles off Indian shores.
The key to wealth and control is equity
Equity = ownership.
That’s why shares are ‘equities’. And why we buy them. We buy the right to share ownership of a company’s assets and future upside. If you control enough equity, you get to run things.
China, like any good investor, understands this well.
Which is why Italy’s allies were so concerned this month when the country announced it would be the first developed country to sign up to the Belt and Road Initiative with China.
President Xi visited Rome and signed €2.5bn worth of deals.
One of the more sensitive areas is development of the port at Trieste. It sits atop Italy’s north-east border, near Slovenia and Croatia. This would enable Chinese ships to get their goods to European markets more swiftly.
It will impact manufacturing in central Europe.
Meanwhile, across the continent, The New York Times reports that Macron of France, Merkel of Germany, and other European leaders are concerned with ‘China’s aggressive, and troubling, economic expansion into Europe.’
The lightning rod for their concern is the Greek port of Piraeus. This began with debt-laden Greece courting Chinese investment into the port a few years ago.
Sound like Sri Lanka?
Today COSCO (the Chinese state-owned shipping company) almost entirely controls the Greek port. It has full control of the Piraeus Container Terminal and majority control of the Piraeus Port Authority. [openx slug=inpost]
Why is Italy walking this line?
For years, many in Italy have felt the EU is sucking away the country’s productivity through excessive regulation. The bloc has been pressuring the government to reduce debt to within recommended levels. Budget deficits proposed by the new 5-Star Government fly in the face of this.
Italian government debt runs at over 130% of GDP. This is the second-highest in the EU after Greece.
In 2010, Greece would have gone bankrupt had the EU not provided further lending to enable repayments. Of course, this lending came with conditions. The government had to agree to tough austerity measures, which weigh on the Greek economy to this day.
While government debt is a problem in Italy, this gets cushioned somewhat by low levels of household debt. Household debt in Italy is actually relatively low at around 41% of GDP — beneath that of Germany, France, and the UK.
In 2017, New Zealand government debt was only 22% of GDP. Our household debt is more concerning at over 93%. Yet this reflects a different economy. A flexible government with room to invest. A growing population. Households actively spending in the economy — although dangerously on housing.
Simply speaking, Italy seeks new economic growth. It is a familiar spiral. Unemployment is high. Nervous households save. Demographics are in decline. The government spends and goes into debt to try and kickstart the economy and reinvigorate aging infrastructure. With EU debt limits circling, Chinese investment appears as fresh honey in a barren land.
Italy could be in a stronger position than others though when it comes to accepting Chinese investment.
The undersecretary for economic development, Michele Geracitold, said that ‘Italy would avoid China’s debt traps and that its laws prevent foreigners from taking control of its ports.’
Italy has recovered before and dramatically. The country experienced strong economic growth from the 1950s to the late 1960s when it transformed itself from a poor, mainly rural national into a global industrial power.
The country is still a significant producer. It’s the eighth-largest exporter in the world and the second-largest manufacturer in the EU (behind Germany). It’s been running a significant trade surplus. It is the world’s largest wine producer and owns the world’s third-largest gold reserve.
The challenges it currently faces are structural.
Compared to the UK and Germany, Italy has experienced low levels of foreign direct investment.
Time will tell whether Belt and Road is a good investment to help Italy grow or a mistake that will lead to giving up equity in key assets. Right now, the Italian government seems confident they can make it work.
The Italian story could go two ways
Either there will be new investment, restructuring, and a next overdue phase of the Italian economic miracle…or the country will descend into further decline.
Somehow, I feel optimistic. Perhaps I have enough Italian blood to be biased. Still, there’s enough wealth and potential in Italy to turn things around.
Warren Buffett seems to think so.
In late 2017, he bought 9% of Italian insurer Societa Cattolica di Assicurazioni Scrl. In January of this year, he started a push into Milan property through Berkshire Hathaway’s real-estate brokerage.
While Chinese investment into Italian infrastructure could be predatory, there is a growing certainty: more money is coming to Italy. Its expertise in design, fashion, and manufacturing attract capital. And that could lead to turnaround growth.
How could you profit?
When I was in Europe, I started investing in Italian real estate via REITs. A REIT is a real-estate investment trust. You enjoy part-ownership of the assets through the shares and receive dividends. A REIT is required to pay most of its rental income out as dividends.
Investing in a large REIT provides you meaningful exposure to an economy.
Immobiliare Grande Distribuzione [BIT: IGD] is the largest owner of shopping malls and hypermarkets in Italy and Romania. As a significant listed player in the Italian retail market, the stock price is aligned to the fortunes and expectations for the Italian economy.
IGD has been cheap — with book value per share currently at around 60% of asset value.
Are things about to turn? When I visited their Mondovicino mall in Piedmont in 2017, it was thriving.
Of course, there remains risk. Will public debt drown Italy? Can shopping malls and supermarkets keep attracting customers in the online age? Will the euro weaken further against our dollar?
Meanwhile, as Italy courts Chinese investment, hopefully it has learnt the lessons of Sri Lanka and Greece. Money is never free. And it comes most easily to those who don’t need it.
Invest widely and well. When things get difficult, a good portfolio can protect you from giving up your freedom.
Analyst, Money Morning New Zealand
Simon Angelo owns shares in Immobiliare Grande Distribuzione [BIT:IGD] via portfolio manager Vistafolio.