Lonergan thinks that it is the standout region in terms of value, even though it has had a decent run since Mario Draghi’s "we will do whatever it takes" speech last summer. "We see Italy as a market that’s extremely undervalued," he said. "On some metrics it’s as cheap to buy as it was in October 2008."
"It’s a market that I could see double over the next two years. Somewhere between 70 and 100 per cent on a two-year horizon is realistic."
"The caveat to this, of course, is a reversal of policy in Europe. If the Draghi magic show doesn’t work – which it has up until now – then things could change."
While Lonergan accepts that the 24-month period is likely to be a bumpy one, he says extended valuations in the cash, bond and some parts of the equity market mean that there is a need to take the volatility on the chin.
"For me, the price of being afraid of volatility is a phenomenally costly one," he said.
Performance of indices over 1yr
Source: FE Analytics
FE data shows that the MSCI Italy index has returned 25.97 per cent in the last 12 months, putting it slightly ahead of the MSCI AC World index, though some 5 percentage points behind the MSCI Europe ex UK index.
In spite of its strong run, the index has been very volatile, shedding significantly more of its value during market sell-offs compared with the wider European index.
As the manager points out, Italy is still very cheap even compared with the depths of the financial crisis. Our data shows that the MSCI Italy index has returned only 29.62 per cent since the beginning of March 2009, putting it well behind the European and global indices.
Performance of indices since March 2009
Source: FE Analytics
"By and large it’s a good time to buy an equity market when its economy is in a recession – that’s pretty much a golden rule of investment, which has a lot of empirical evidence to support it," Lonergan explained.
"The interesting thing about the periphery is that it’s been in a recession when most of the rest of the world hasn’t," he said.
"Countries like Italy went into the financial crisis with a reasonable P/E [price/earnings] ratio, and then in 2008 saw a huge sell-off. After that came the eurozone crisis and so the market is very cheap."
"From peak to trough, Italian productivity fell 30 per cent, so we’re looking at a very bad recession," he added.
Referring to the recent interest rate cut, Lonergan says the fact that the ECB is now easing monetary policy because it has a set macroeconomic objective in place, rather than purely out of desperation, is a very good sign for the periphery. This is because it is coming from such a low level.
With the exception of Stephen Andrews’ M&G Episode Income fund, all of M&G’s multi-asset portfolios are overweight peripheral Europe and Italy in particular. These include the £945m M&G Episode Growth and £345m M&G Episode Balanced funds.
While Andrews agrees that Italian equities are cheap, he says their risk profile is too high for his strategy.
"My clients are interested in the journey as well as the returns," the manager explained.
Given that the entire Italian market has suffered from the negative sentiment, Lonergan says there is little need to be selective when it comes to getting access to the recovery story. He points out that banks dominate the Italian index and so they are likely to drive performance.
Head of the multi-asset team David Fishwick says that buying markets when everyone else is fearful is the key to making money over the long-term – though he accepts this is an extremely difficult thing to do.
"If Eric had made this speech about Italy in 2012, I would have laughed at him," he said. "Now suddenly it feels more pleasant, but only because the news flow is more positive and the markets have gone up."
"However, I think there’s still a lot more juice in [Italy]."
In this vein, Fishwick says one market that looks potentially interesting at the moment is South Africa. The MSCI SA index has lost money over one year, and the rand has performed dreadfully compared with other major currencies, including sterling.
Performance of index and currency over 1yr
Source: FE Analytics
For those who want access to the Italian market, there are no specific options in the IMA unit trust and OEIC universe, or AIC Investment Companies universe.
An ETF is one option – for example Amundi ETF MSCI Italy, which has been very successful at tracking its benchmark in recent months.
Performance of ETF and index over 1yr
Source: FE Analytics
Alternatively, investors could get exposure to Italy via a European or global manager who is overweight the region.
As well as the M&G Episode range, funds that are currently backing the cheap valuations in Italy include Franklin European Opportunities and J Chahine Digital Stars Europe ex UK, which both have more than 10 per cent in the country.
