Italy After Unification

Italy After Unification

 

Bryan Taylor, Chief Economist, Global Financial Data

 

 

 

              Global Financial Data continues its mission of collecting historical data on stock markets throughout the world to provide the longest equity histories available for every country in the world.  GFD has collected data from a number of sources to extend the data series for Italy back to 1856.

 

              Italy provides an important addition to the collection of countries with equity data in the 1800s.  Between 1856 and 1947, Italy industrialized, unified the nation together both through building railroads and by forging the Italian peninsula into a single country. Italy fought in both World War I and World War II and suffered high inflation after World War II.  Italy is of particular interest because it had one of the lowest returns to stocks and bonds of any country in Europe in the twentieth century.  An analysis of data from the nineteenth century will determine whether Italy’s low returns existed before World War I as well.

 

              The primary source that GFD used for Italy during the nineteenth century was Mario da Pozza and Giuseppe Felloni’s La Borsa Valori di Genova nel Secolo XIX (The Genoa Stock Market in the Nineteenth Century).  Pozza and Felloni collected data for 14 stocks on the Genoa stock exchange between 1856 and 1896 and provided price, capitalization, dividend and corporate action data on those companies.  In addition, GFD used various issues of Indici e Dati relativi ad Investimenti in Azioni Quotate nelle Borse Italiana which provided price, dividend and share outstanding data on companies listed on the Milan Stock Exchange beginning in 1928. For the years between 1896 and 1928, we relied on two newspapers to collect data, the Corriere della Sera which was published in Milan and provided data on the Milan and Rome stock exchanges from 1881 until the present and the La Stampa newspaper published in Turin which continued the data series in the La Borsa Valori book from 1897 until the 1914. The Annuario Italiana del Capitalista provided price data, dividend data, shares outstanding, par values and founding dates for corporations listed on all of the exchanges in Italy. Finally, La Societa Quotate alla Borsa Valori di Milano dal 1861 al 2000 provided histories of each company that listed on the Milan Stock Exchange between 1861 and 2000.  By combining the resources of these books and newspapers, we were able to put together data histories on over 100 stocks that traded in Milan, Rome and Genoa between 1856 and 1947 so we could calculate indices for Italy over a 90-year period.

 

                  The years before 1905 were terra incognita until now. The surprise here is that although the Italian stock market showed dramatic declines between 1914 and 1945, returns were relatively stable until World War I. The performance of the Italian stock market between 1856 and 2024 is illustrated in Figure 1.  The Italian stock market rose in price between 1856 and 1871 by which time the Italian peninsula had been forged into a single country, but Italian equities made no progress between 1871 and 1932.  In fact, the stock market declined during those sixty years in nominal terms.

 

Although Italy participated in World War I on the side of the allies between May 1915 and November 1918, Italy suffered during the post-World War I recession like every country did. Mussolini was in power between 1922 and 1945, and the stock market did poorly while Mussolini was in power. Italy’s participation in World War II led to wide-scale destruction of the Italian economy. The large stock price gains between 1940 and 1948 were primarily due to inflation. Relative to consumer prices, however, the Italian stock market declined between 1939 and 1945. The Italian economy recovered dramatically from World War II in the 15 years that followed the end of the war.  The stock market declined between 1960 and 1977, recovered between 1977 and 2000, but has made no progress since then.  Italy suffered from a lack of political stability and from inflation until it joined the Euro in 1999. The Italian stock market has failed to exceed the highs it reached in 2000.  Italy has performed as poorly during the first quarter of the twenty-first century as it did during the first quarter of the twentieth century.

 

Figure 1.  Italian Stock Market Price Index in ITL/EUR, 1856 to 2024

 

                  A better understanding of the Italian stock market is provided in Figure 2 which adjusts the stock price index for inflation. The Italian stock market has fluctuated between periods of gradually rising real stock prices and periods of dramatic declines. The addition of the stock market data in the 1800s shows that the Italian stock market was relatively stable until World War I. The stock market rose in value between 1860 and 1890 but declined for the next 55 years until 1945 with particularly large drops during World War I and World War II.  The market recovered between 1945 and 1960, but collapsed again, falling to new lows by 1977. The market recovered until 2000 but is currently below where it was 25 years ago.

 

Figure 2.  Italian Stock Market Index Adjusted for Inflation, 1856 to 2024

 

The relative performance of stocks, bonds and bills is illustrated in Figure 3. Between 1873 and 1914, stocks provided positive returns after dividends, as did bonds and bills. However, between 1914 and 1945, after inflation, total returns to stocks, bonds and bills were all negative. Stocks did well between 1945 and 1968 and between 1981 and 1999 but have barely broken even since then. Bonds did well between 1981 and 2019 when government bond yields plummeted from 21.4% to 1.4% but have provided negative returns during the past five years when interest rates have risen.

 

                  If you compare returns between stocks, bonds and bills, it is interesting that all three provided similar returns between 1856 and 1939.  It was only during the post-war inflation and recovery that stock returns exceeded the returns to bonds and bills. This occurred both because stocks were able to keep up with the post-war inflation better than bonds and bills since stocks were backed up by real assets, not financial paper, and because corporations benefitted from the post-war recovery. Between 1968 and 1999, returns to stocks and bonds were similar with the Equity Risk Premium close to zero.  Between 1999 and 2019, bonds outperformed stocks as Italy benefitted from the declining bond yields which the Euro provided Italy, and the stock market stagnated. The most important fact the extension of the Italian data back to 1856 revealed was the similarity in returns between stocks, bonds and bills between 1856 and 1939.  We now have a better understanding of the periods when stocks outperformed bonds and when they did not.

 

Figure 3.  Italian Returns to Stocks, Bonds and Bills in ITL/EUR, 1856 to 2024

                  The difference between the returns to stocks and bonds is illustrated in Figure 4, which compares the annualized 10-year returns to stocks and bonds between 1866 and 2024.  Stocks outperformed bonds between 1866 and 1876, but for the most part, between 1866 and 1939, stocks underperformed bonds in Italy over 10-year periods of time.  Figure 4 allows us to concentrate on the periods when equities prevailed and when bonds prevailed. Stock dramatically outperformed bonds between 1939 and 1969, but since 1970, stocks have underperformed bonds in most years.  Stocks have outperformed bonds during the past five years as bond yields have risen, and this trend is likely to continue for the rest of this decade.  Figure 4 illustrates how poorly equities have performed in Italy relative to bonds.  In most countries, bonds outperforming stocks are the exception rather than the rule.  This is not the case in Italy, where the relative performance is evenly split between stocks and bonds. The addition of data back to 1856 helps us to understand that stocks generally underperformed bonds between 1876 and 1939.

Figure 4. Italy 10-year Equity Risk Premium, 1866 to 2024

                  One source that could affect the relative returns to stocks and bonds is stock market capitalization and government debt relative to GDP. The Italian stock market has always represented a small percent of Italian GDP with the ratio of stock market capitalization to GDP never exceeded 70% and with a few minor exceptions, stayed below 50%.  Even today, when the US stock market’s capitalization is about twice national GDP, Italy’s market cap is around 35% of GDP.  This indicates that Italy both has placed little faith in the equity market and that it has historically provided low returns.   On the other hand, Italy’s government debt has consistently exceeded the stock market’s capitalization. During the 1940s, the Italian government “paid off” its government debt through high inflation in the 1940s that reduced the ratio of government debt from almost 100% of GDP to less than 25% of GDP. The debt remained relatively low through the 1950s and 1960s, but has increased since then, and is currently almost 150% of GDP, which means that Italy has the highest government debt/GDP ratio of any developed country except Japan.  This has constrained growth and kept bond yields high relative to the rest of Europe. Investors should be concerned that Italian government debt does not continue to grow during the 2020s because this will restrain growth in the Italian economy and affect the performance of the stock market.  The addition of the data back to 1856 underlines the fact that equities have not played an important role in the Italian economy.

Figure 5.  Italy Stock Market Capitalization and Government Debt as a % of GDP, 1860 to 2024

                  The sources that were used enabled us to calculate a monthly stock index between 1856 and 1947.  This allows us to determine more precisely the dates of the bull and bear markets that occurred in Italy before World War I. Bear markets began in Italy in 1856, 1863, 1872, 1886 and 1906. In the 1850s, Italian shares were primarily in banks. The decline beginning in 1856 reflected uncertainty over the impact of the “Risorgimento” aimed at unifying Italy into a single country. The 1863-1866 bear market ended when Italy allied with Prussia in the Austro-Prussian war which allowed Italy to annex Vence into the nation’s borders. The unification of Italy was completed in 1870, and Rome was declared the nation’s capital in 1871. The period between 1872 and 1877 was one of global economic slowdown, as witnessed by the Panic of 1873 in the United States. The Italian economy slowed down in the late 1880s and early 1890s.  Banca d’Italia stock lost over half of its value during this period as did other banks’ shares. The same could be said of the 1906-1915 bear market which was driven by the Panic of 1907 and the outbreak of war in Europe in 1914.  Of course, there was no change in the post-1914 dates for the bear markets in Italy. Information on all of Italy’s bear markets is provided in Table 1.

Bottom	Bear Decline	Top	Bull Rise
		3/31/1856
04/30/1859	-51.89	06/30/1863	81.72
07/31/1866	-39.22	12/31/1872	262.16
05/31/1877	-38.43	12/31/1886	52.58
08/31/1894	-58.39	3/31/1906	47.25
12/31/1915	-50.26	7/31/1918	85.09
7/31/1921	-51.33	2/28/1925	134.65
6/30/1927	-46.59	2/28/1929	46.72
5/31/1932	-65.41	12/31/1944	1877.01
4/30/1946	-59.51	5/31/1947	661.50
3/31/1948	-65.12	9/9/1960	1275.06
1/14/1965	-59.33	4/24/1970	47.99
11/24/1971	-39.17	6/19/1973	66.93
12/22/1977	-66.15	6/3/1981	431.93
7/22/1982	-49.58	5/20/1986	516.86
2/9/1988	-53.32	6/19/1990	78.97
9/16/1992	-53.22	5/13/1994	100.04
12/5/1995	-31.75	4/6/1998	201.21
10/9/1998	-36.46	3/10/2000	106.80
3/12/2003	-56.36	5/18/2007	127.21
3/9/2009	-69.32	10/19/2009	83.31
7/24/2012	-46.25	4/15/2015	91.27
6/27/2016	-35.29	5/7/2018	61.77
12/27/2018	-26.17	2/19/2020	39.43
3/12/2020	-41.15	1/5/2022	88.90
10/12/2022	-27.63

Table 1.  Bull and Bear Markets in Italy, 1856 to 2024

              With the addition of the data back to 1856, we can analyze the long-term trends in returns to Italian stocks, bonds, bills and inflation. Table 2 converts Italian returns into real US Dollars so the data can be directly compared with returns in other countries.   Unfortunately, Italy has the worst equity returns of any developed country.  While a country such as Germany may have periods of poor performance due to war or hyperinflation, Italy has consistently performed poorly decade after decade. Real returns in USD were negative for stocks in the 1910s, 1920s, 1940s, 1970s, 2000s and 2010s. Double-digit returns occurred in the 1860s, 1950s and 1980s, but Italy had double-digit annual losses in the 1970s.  The primary difference in returns to stocks and bonds occurred in the 1940s and 1950s when the equity risk premium averaged 20 percent over a 20-year period. During the period from 1856 to 1939, however, the equity risk premium was less than one percent and from 1959 to 2019 the equity risk premium was negative. The period from 1914 until 1981 exhibited high inflation which reduced the returns to bonds for over 60 years.  Bonds recovered as Italian inflation declined between 1981 and 2019, allowing bond yields to fall, but since 2020 government bond yields have risen.  Government bond yields fell below one percent in 2021 but have since increased to the three to four percent range, levels that yields hadn’t been at in ten years.

Years	Stock Price	Stock Return	Bond Return	Bill Return	ERP	Inflation
By Decade
1859-1869	3.38	10.64	-1.29	2.32	12.09	0.1
1869-1879	2.94	9.17	12.74	5.46	-3.16	1.45
1879-1889	0.88	1.44	6.37	5	-4.64	-0.64
1889-1899	-3.8	4.03	5.85	5.24	-1.72	-0.19
1899-1909	-3.29	0.32	2.64	2.67	-2.26	0.75
1909-1919	-9.04	-5.53	-7.3	-3.75	1.91	11.17
1919-1929	-9.29	-4.33	-6.99	-3.68	2.87	8.58
1929-1939	-2.74	1.67	1.07	0.19	0.6	0.35
1939-1949	-9.03	-7.21	-25.33	-25.21	24.27	49.56
1949-1959	15.36	21.7	1.77	2	19.58	3.89
1959-1969	-2.68	1.05	2.38	1.11	-1.29	3.71
1969-1979	-14.51	-11.94	-3.24	1.01	-8.98	12.89
1979-1989	12.4	16.37	6.68	5.31	9.08	10.43
1989-1999	1.42	4.94	6.49	2.15	-1.45	3.98
1999-2009	-3.51	-0.1	6.87	3.94	-6.52	2.21
2009-2019	-3.33	-0.51	1.67	-3.99	-2.15	1.12
By Era
1873-1896	-0.93	5.42	8.48	6.07	-3.06	-0.69
1896-1914	-2.1	1.22	1.99	3.24	-0.75	0.7
1914-1929	-10.86	-6.39	-8.86	-5.95	2.7	12.91
1929-1945	-6.41	-3	-8.58	-10.27	6.11	24.07
1945-1968	4.16	8.51	-3.92	-3.85	12.94	5.88
1968-1981	-9.18	-6.36	-6.82	-1.08	0.49	13.08
1981-1999	6	9.76	10.62	5.56	-0.78	5.93
1999-2019	-3.42	-0.31	4.24	-0.11	-4.36	1.66
2019-2023	1.1	5.46	-7.78	-3.81	14.35	3.88
To Present
1899-1999	-2.55	1.24	-2.65	-2.21	3.99	9.81
1859-2023	-1.76	2.35	0.05	-0.4	2.31	6.23
1899-2023	-2.57	1.12	-1.74	-1.93	2.92	8.19
1919-2023	-1.86	1.86	-1.6	-2.19	3.52	8.73
1929-2023	-1.03	2.55	-1.01	-2.03	3.59	8.75
1949-2023	0.34	4.06	2.55	1.31	1.47	5.3
1969-2023	-1.67	1.64	2.73	1.22	-1.06	5.86
1999-2023	-2.68	0.63	2.13	-0.73	-1.47	2.03

Table 2.  Italian Returns to Stocks, Bonds and Bills in Real USD, 1859 to 2023

 

Conclusion

              Adding 50 years of monthly data to the Italian stock market allows better perspective on the long-term returns to stocks in Italy. Since there was only one or two companies trading in Italy between 1845 and 1854, it is unlikely that we will be able to extend the series on Italian stocks back any further. The Kingdom of Italy didn’t even exist as a country until March 17, 1861, when the Risorgimento joined the separate Italian states into a single country. Venice joined Italy in 1866 and Rome in 1870.

Adding this data is important because Italy has the worst performing historical stock record of any major developed country.  Among the causes of these low returns were Italy’s poor performance under Mussolini between 1922 and 1945, Italy’s high rate of inflation, Italy’s low market capitalization as a share of GDP, the high ratio of government debt to GDP, and Italy’s lack of political stability after World War II.  Although northern Italy was able to develop industries which successfully exported goods to the rest of the world, southern Italy did poorly and remained economically backward relative to the rest of Italy.

              Adding the data back to 1856 shows that Italy’s performance was closer to the European average before World War I. Italian stocks have fluctuated between periods positive returns and dramatic losses after inflation. The real problem came between 1914 and 1981 when war and inflation reduced returns. This was when the government increased its intervention in the Italian economy to the detriment of stock returns. Italy’s high historical inflation reduced the real returns to stocks and bonds. The average annual inflation rate during the twentieth century was 9.8 percent, condemning Italian investors to low returns. Even today, the FTSE Italia All-Share index remains 20 percent below its peak in 2000 while the S&P 500 Index is four times the level it was at in 1999.  The Italian stock market declined by 70 percent between 2000 and 2012, a decline from which it has not fully recovered. Real Italian GDP is at the same level it was at in 2007. Italy enjoyed a forty-year decline in bond yields between 1981 and 2021, but Italy can rely upon falling bond yields no more.  Although inflation is likely to remain tame, the high level of government debt hangs over Italy like the sword of Damocles ensuring that bond yields will remain high relative to the rest of Europe. Until Italy’s GDP can begin growing once again, equity returns are likely to remain low relative to the rest of Europe.