Shorting Italy Is Risky, Despite Horrible Demographics

Jul. 2.09 | About: iShares MSCI (EWI)

We read with interest yesterday's Research Edge Seeking Alpha article on "Ailing Italian Economy Ripe for Shorting."

We agree with Research Edge's view that Italy will continue to lag or struggle into the current global economic recovery. Why? Demographically they are upstream without a paddle. The chart below shows that Italian generations have been stalled since about 1885 and declining since the GI Generation, born 1905-1924.

The generational numbers in the birth chart below indicate that the Italian economy will continue to contract on both the domestic and international front. The Italian Silent Generation declined 3.8 percent (the U.S. Silents declined 7.4 percent), followed by a 9 percent decline of the Baby Boomers (U.S. Baby Boomers were up 50 percent), then followed by Generation X with a decline of 12.6 percent (U.S. Generation X declined by 11.9 percent), and Italy's Generation Y fell by 31.9 percent (the U.S. Generation Y rose by 14.7 percent).

Although demographics are an important part of the long term investment puzzle, a stock market's valuation is equally as important. The second chart shows that the Italian market remains undervalued with its current dividend yield of about 5 percent, an undervaluation that would remain even if that yield fell to 4 percent.

Therefore, we agree the Italian market (NYSEARCA:EWI) should relatively underperform other markets from here on in. However, to short the index aggressively at this point in the recovery would appear risky.

Source: Age Curve Consulting

Source: Ned Davis Research