What should investors do as Italian crisis sends euro stock markets crashing?

The Greek crisis is long over, but will Italy prove to be the undoing of the euro and a threat to European stock markets?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’ve long been a champion of the EU as a free market association (and I think it’s a modern tragedy that the UK is leaving), but a staunch opponent of that flawed idea that is the common currency, the euro. Sadly, the latter could bring down the former.

While EU leaders have had opportunities to run a tightly-regulated ship, I reckon one of the potentially most calamitous mistakes was fudging the rules to allow Italy to remain a core part of the euro, despite that country’s inept fiscal state.

The Italian farce is raising its head again, as political machinations are badly hitting the continent’s stock markets. With the ongoing power struggle between populist eurosceptics who did well in March’s election and the incumbent pro-EU parties failing to make much headway, it looks like we could be in for fresh elections in September.

Italy’s debt stands at around 130% of its GDP, and that soars over France’s still-high level of around 96% and dwarf’s Germany’s mere 68%. Do those sound like three countries that can comfortably share a currency and common banking rules? Hmm.

There’s been a bit of a panic sell-off of Italian debt on Tuesday, which the head of Italian bank UniCredit has described as unjustified (well he would say that, wouldn’t he?) And that’s led investors to fear for the health of Italian banks, with share prices of a number of them tumbling.

Markets falling

The Italian FTSE MIB index is down 2.4% as I write, with France’s CAC 40 down 1.2% and Germany’s DAX down 1%. And even the FTSE 100 has lost 1.2%. Those aren’t massive falls just yet, but they could presage a worse downturn if investors’ biggest fears should be realised.

And those fears, surely, must be of a populist attempt for Italy to quit the euro. It’s probably unlikely to happen, but even a growing anti-euro movement based on the rejection of EU-led austerity could deepen a longer-term north-south divide within the EU.

The possibility of that scenario is already pushing some investors away from euro risk, and European markets could be in for a few shaky months ahead of the likely new Italian elections.

What should we do as private investors? The obvious thing is don’t panic. Next, think back to what the Greek crisis did for us, and which Brexit then massively eclipsed. Brexit gave investors some great bargains, especially in the banking and finance sectors.

Shares in Lloyds Banking Group plummeted when the referendum result was known, but investors who took advantage of it have enjoyed a 19% gain since that date, plus bigger effective dividend yields through buying when the shares were being punished.

And Lloyds has been a relatively poor performer, with Barclays shares up 44% since that Brexit date (albeit without the big dividends). And Royal Bank of Scotland shares have soared by 64%.

I reckon continuing political uncertainty in Italy is likely to put downward pressure on banking shares again, including British ones. In fact, they’ve all lost ground on Tuesday — Barclays down 2.2%, Lloyds down 1.6%, RBS down 2.5%, and even HSBC Holdings shares have fallen 1.2%.

And other than finance stocks, I say we should just keep on buying shares in top UK companies to help fund our retirements, and thank the Italians for helping push prices down a bit for us.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »