SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

ASSIGNMENT

On

COUNTRY ANALYSIS OF ITALY

Submitted to
submitted by

Mr. K.T.Rengamani
Mahendran

Associate dean, VIT Business School

Sandhya

VIT
Usha

Srinivas

Velmurugan

Vijay Kumar.B
 ITALY

Crisp info on Italy:-

Official name

Italian Republic

Legal system

Based on constitution of 1948

National legislature

Bicameral: Senate of 315 seats; Chamber of Deputies of 630 seats

National elections

April 13th-14th 2008; next election due in April 2013

Head of state

The president, elected for a seven-year term by an electoral college of the Senate, the Chamber
of Deputies and regional representatives, has no executive powers. Elected in May 2006, the
term of the current president, Giorgio Napolitano, runs until mid-May 2013

Prime minister: Silvio Berlusconi (PDL)

National government

Council of Ministers headed by a prime minister, appointed by the president on the basis of
ability to form a government with parliamentary support. The present government was formed by
Silvio Berlusconi in May 2008

Political coalitions and parties

The main parties represented in parliament are: Government: the right-of-centre Popolo della
Liberta (PDL), comprising Forza Italia (FI), Alleanza Nazionale (AN), Democrazia Cristiana per
le Autonomie (DCA) and several other micro parties

Some important figures:-

Annual data 2007(a) Historical averages 2003-

(%) 07
Population (m) 58.1 Population growth 0.1
GDP (US$ bn; market 2,101(b) Real GDP growth 1.1
exchange rate)
GDP (US$ bn; purchasing 1,785 Real domestic demand 1.2
power parity) growth
GDP per head (US$; 36,139 Inflation 2.2
market exchange rate)
GDP per head (US$; 30,703 Current-account -1.8
purchasing power parity) balance (% of GDP)
Exchange rate (av)€:US$ 0.731(b) FDI inflows (% of 1.4
GDP)
Unemployment Rate -7%

External Debt (2006E) - $2.0 trillion

Exports (2006E) -$415 billion

Exports - Commodities -engineering products, textiles and clothing, production machinery,

motor vehicles, transport
Equipment, chemicals; food, beverages and tobacco; minerals and nonferrous metals

Exports – Partners- Germany 13.7%, France 12.1%, US 8%, Spain 7.3%, UK 6.9%, Switzerland
4.1%

Imports (2006E) - $427 billion

Imports – Commodities- engineering products, chemicals, transport equipment, energy products,

minerals and
Non ferrous metals, textiles and clothing; food, beverages and tobacco

Imports – Partners- Germany 18.1%, France 10.7%, Netherlands 5.8%, Spain 4.7%, Belgium
4.4%, UK 4.3%,
China 4.1%

Current Account Balance--$42 billion

Background.

Post-war Italy has been characterized by a weak political structure and a strong, but recently
declining economic base. In 1996 Italy moved to a bipolar political system, dominated by a
right-of-centre alliance led by Silvio Berlusconi and a broad left-of-centre coalition, led by
Romano Prodi until early 2008. Despite the defection of a small centrist group, Mr. Berlusconi
won a clear victory in the April 2008 election. The centre-left led by Walter Veltroni refused to
enter into an alliance with the hard left, who failed to win any seats.

PEOPLE

Italy is largely homogeneous linguistically and religiously but is diverse culturally, economically,
and politically. Italy has the fifth-highest population density in Europe--about 200 persons per
square kilometer (490 per sq. mi.). Minority groups are small, the largest being the German-
speaking people of Bolzano Province and the Slovenes around Trieste. There are also small
communities of Albanian, Greek, Ladino, and French origin. Immigration has increased in recent
years, however, while the Italian population is declining overall due to low birth rates. Although
Roman Catholicism is the majority religion--85% of native-born citizens are nominally
Catholic--all religious faiths are provided equal freedom before the law by the constitution.

Europe's Renaissance period began in Italy during the 14th and 15th centuries. Literary
achievements--such as the poetry of Petrarch, Tasso, and Ariosto and the prose of Boccaccio,
Machiavelli, and Castiglione--exerted a tremendous and lasting influence on the subsequent
development of Western civilization, as did the painting, sculpture, and architecture contributed
by giants such as da Vinci, Raphael, Botticelli, Fra Angelico, and Michelangelo.

Political structure.

Italy has been a democratic republic since June 2, 1946, when the monarchy was abolished by
popular referendum. The constitution was promulgated on January 1, 1948.

The Italian state is centralized. The prefect of each of the provinces is appointed by and
answerable to the central government. In addition to the provinces, the constitution provides for
20 regions with limited governing powers. Five regions--Sardinia, Sicily, Trentino-Alto Adige,
Valle d'Aosta, and Friuli-Venezia Giulia--function with special autonomy statutes. The other 15
regions were established in 1970 and vote for regional "councils." The establishment of regional
governments throughout Italy has brought some decentralization to the national governmental
machinery, and recent governments have devolved further powers to the regions. Many regional
governments, particularly in the north of Italy, are seeking additional powers.

Parliament is elected for a maximum of five years. A reform of the electoral system returned
Italy to a system based on proportional representation (PR) for the 2006 and 2008 elections. The
president, who is elected by parliament for a seven-year term, decides whether to call an election
or to nominate a prime minister to try to form a government in the event of a political crisis. He
also promulgates laws and may return a law to parliament for reconsideration. Executive power
lies with the cabinet, which is nominated by the prime minister and approved by parliament. The
prime minister cannot dismiss ministers without forming a new government.

POLITICAL CONDITIONS
Until recently, there had been frequent government turnovers (more than 60 and counting) since
1945. The dominance of the Christian Democratic (DC) party during much of the postwar period
lent continuity and comparative stability to Italy's political situation.

From 1992 to 1997, Italy faced significant challenges as voters--disenchanted with past political
paralysis, massive government debt, extensive corruption, and organized crime's considerable
influence--demanded political, economic, and ethical reforms. In 1993 referendums, voters
approved substantial changes, including moving from a proportional to a largely majoritarian
electoral system and the abolishment of some ministries. However in 2005, parliament passed a
new electoral law based on full proportional assignment of seats.

Major political parties, beset by scandal and loss of voter confidence, underwent far-reaching
changes. New political forces and new alignments of power emerged in March 1994 national
elections. The election saw a major turnover in the new parliament, with 452 out of 630 deputies
and 213 out of 315 senators elected for the first time. The 1994 elections also swept media
magnate Silvio Berlusconi--and his Freedom Pole coalition--into office as Prime Minister.
Berlusconi, however, was forced to step down in January 1995 when one member of his coalition
withdrew support. The Berlusconi government was succeeded by a technical government headed
by Prime Minister Lamberto Dini, which fell in early 1996. New elections in 1996 brought a
center-left coalition to government for the first time after World War II.

A series of center-left coalitions dominated Italy's political landscape between 1996 and 2001.

In January 2008, the Prodi government fell when small coalition partner UDEUR withdrew
support. In February, the President dissolved parliament and Silvio Berlusconi returned to power
after defeating former Rome Mayor Walter Veltroni by a comfortable margin in elections on
April 13-14, 2008. Berlusconi's winning coalition was composed of the People of Liberty (a
union of Forza Italia and National Alliance), the Northern League, and the Movement for
Autonomy. Berlusconi was sworn in as Prime Minister on May 8. Veltroni now heads the
opposition.

ECONOMY
The Italian economy has changed dramatically since the end of World War II. From an
agriculturally based economy, it has developed into an industrial state ranked as the world's
sixth-largest market economy. Italy belongs to the Group of Eight (G-8) industrialized nations; it
is a member of the European Union and the Organization for Economic Cooperation and
Development (OECD).

Italy has few natural resources. With much land unsuited for farming, Italy is a net food importer.
There are no substantial deposits of iron, coal, or oil. Proven natural gas reserves, mainly in the
Po Valley and offshore in the Adriatic, constitute the country's most important mineral resource.
Most raw materials needed for manufacturing and more than 80% of the country's energy sources
are imported. Italy's economic strength is in the processing and the manufacturing of goods,
primarily in small and medium-sized family-owned firms. Its major industries are precision
machinery, motor vehicles, chemicals, pharmaceuticals, electric goods, and fashion and clothing.

Italy continues to grapple with budget deficits and high public debt--2.0% and 105.6% of GDP
for 2007, respectively. Italy joined the European Monetary Union in 1998 by signing the
Stability and Growth Pact, and as a condition of this Euro zone membership, Italy must keep its
budget deficit beneath a 3% ceiling. In June 2006, the European Commission warned Italy it had
to bring the deficit down to that level by 2007. The Italian Government has found it difficult to
bring the budget deficit down to a level that would allow a rapid decrease of that debt.

Italy's economic growth averaged only 0.66% for the five years ending in 2005; 2006 GDP
growth reached 1.9%, the highest since 2000, largely due to export growth to the Euro zone area.
The economy continues to grow less than the Euro zone average, and growth is expected to
decelerate from 1.7% in 2007 to under 1% in 2008 as the Euro zone and world economies slow.

Italy's closest trade ties are with the other countries of the European Union, with whom it
conducts about 60.3% of its total trade (2006 data). Italy's largest EU trade partners, in order of
market share, are Germany (14.9%), France (11.1%), and the United Kingdom (5.3%). Italy
continues to grapple with the effects of globalization, where certain countries (notably China)
have eroded the Italian lower-end industrial product sector.
The Italian economy is also affected by a large underground economy--worth some 27% of
Italy's GDP. This production is not subject, of course, to taxation and thus remains a source of
lost revenue to the local and central government.

Policy issues.

Weak economic growth contributed to a sharp deterioration in the public accounts in 2001-05.
This trend was reversed in 2006-07. Liberalization of protected service sectors has begun, but
remains incomplete. Limited reforms in 2003-04 to improve labor-market flexibility and check
the rise in pension outlays have been diluted. Tax cuts will be the new government's top
economic policy priority. A referendum to be held in 2009 will keep electoral reform on the
agenda. The new government's tough stance on immigration has drawn criticism from within the
EU.

Taxation: In 2007 the income threshold on the top rate of personal income tax (43%) was
lowered and the scope for additional regional and municipal taxes increased. The corporation tax
rate was cut from 33% to 27.5% in 2008. Following a surprise European Court of Justice ruling,
the additional regional business tax (IRAP) to fund health services remains in place. The basic
rate was reduced from 4.25% to 3.9%, but a higher rate of 5.25% can be applied in regions with
large deficits. There are two tax rates on savings (27% on interest and 12.5% on income from
financial investments).

Markets:

The Borsa Italiana S.p. A., based in Milan, is Italy's main stock exchange. It was privatized in
1997, and was acquired by the London Stock Exchange in October 2007. In 2005 the companies
listed on the Borsa were worth US$ 890 billion.

Type subsidiary of public company

Founded 16 January 1808
Headquarters Milan, Italy
Industry Financial services
Products Stock market
London Stock Exchange Group plc
Parent
(LSE.L)

Borsa Italiana organizes and manages the Italian stock market with the participation of nearly
130 domestic and international brokers who operate in Italy or from abroad through remote
membership, using a completely electronic trading system for the real-time execution of trades.
In addition, it performs organizational, commercial and promotional activities aimed at
developing high value-added services for the financial community.
The stock market is divided into five parts. The electronic share market (MTA) trades Italian
shares, convertible bonds, and warrants; the covered warrants market is an electronic share
market. The STAR (Segment for High Requirement Shares) market is within the MTA and
includes companies capitalized from 40 million to 100 million Euros that are already listed and
traded in more traditional sectors. Nuovo Mercato is dedicated to innovation-driven companies.
Stocks, bonds, warrants, and options not admitted to the official exchange are traded on Mercato
Ristretto. Premi Market is for premium contracts on stock exchange products. The afterhour’s
market enables trading of financial instruments after the daytime session closes.

In 2008, Borsa Italiana reaches its 200th anniversary.

Borsa Italiana regulates, develops and manages the Italian equities markets, (MTA/MTAX and
Expandi Market), the Italian Derivatives market (IDEM), the Securitized Derivatives market
(SeDeX), the electronic Fixed Income market (MOT), the electronic ETFs and ETCs market
(ETFplus) and the Electronic Market (MTF) where Closed-end Funds are traded.

MTA- Italy’s equity market

MTA is Borsa Italiana’s electronic market on which shares, convertible bonds, warrants and
option rights are traded. Expandi is the market dedicated to smaller size companies.

On September 19th, 2005 a new market structure was introduced. In particular, within MTA,
companies are now divided into 3 segments: Blue Chip, Star and Standard.

• Blue Chip is the segment dedicated to companies with a capitalization of over 1 billion euro.
• STAR is the segment for companies with a capitalization of less than 1 billion euro which
voluntarily comply with strict requirements on liquidity, transparency and corporate
governance
• Standard is the market for all companies with a capitalization between 1 billion and 40
million euro.

The Expandi market is specially designed for small cap companies operating in traditional
sectors, with consolidated positions in their markets and a positive track record of economical-
financial results. It is appealing for all small cap issuers as it is a market characterized by
simplified admission requirements and a fast listing process.

Italy Balance of Payments April 2008

In April 2008 Italy's current account deficit stood at 4,129 EUR million compared to a deficit of
4,726 EUR million in April 2007. Positive movements in the services balance (650 EUR million)
and the goods balance (352 EUR million) were partly offset by negative movements in the
income balance (211 EUR million) and in current transfers (194 EUR million).

In the 12-month period to April 2008, the current account recorded a deficit of 38,297 EUR
million compared to a deficit of 39,089 EUR million a year earlier. A positive change in the
goods balance (10,176 EUR million) was almost entirely offset by a negative change in the
income (6,704 EUR million), services (1,349 EUR million) and current transfers (1,331 EUR
million) balances.

In April 2008 direct investment showed a net outflow of 1,106 EUR million and portfolio
investment showed a net inflow of 14,454 EUR million. ‘Other investment’ recorded a net
outflow of 13,708 EUR million. Compared to April 2007, Italian direct investment abroad
decreased by 2,193 EUR million, and Italian portfolio investment decreased by 16,576 EUR
million. Foreign direct investment decreased by 758 EUR million and foreign portfolio
investment increased by 7,929 EUR million, reflecting investment in 'debt securities’.

In the 12-month period to April 2008, direct investment showed a net outflow of 27,701 EUR
million compared to a net outflow of 26,086 EUR million a year earlier.

Net portfolio investment increased by about 94 EUR billion from a net inflow of 5,560 EUR
million to a net inflow of 99,670 EUR million. On the one hand Italian investment in equities
and debt securities decreased respectively by about 60 and 31 EUR billion and foreign
investment in debt securities increased by about 25 EUR billion. On the other hand foreign
investment in equities decreased by about 22 EUR billion.

Insurance In Italy

The insurance sector in Italy is continued to play a major role in Italy's financial markets due to
the deficit of the national pension and health system and the increased importance of the newly
created private pension funds.

A unique and helpful feature of Italian insurance company reports is the inclusion of financial
statements of major subsidiary or affiliated companies.

The Italian insurance market was traditionally characterized by a relatively large number of
insurers with no one organization dominating the industry.

Among the top ten Insurance companies operating in the sector,eight are large Italian insurance
companies led by “Assicurazioni Generali”

There are a number of foreign insurance companies operating through subsidiaries in Italy: these
are primarily French and German companies.

Countries whose firms have the strongest market presence are Germany (Ras, Lloyd Adriatico),
Switzerland (Winterthur Assicurazioni) and France (Axa Assicurazioni).

Presently so many US Companies are doing business in Italy (including AIG Europe, Cigna Life
Insurance, Chubb Insurance, Prumerica Life and Allstate).

Italy's market indicates moderately low penetration when compared to North America and
Northern Europe, especially for life products. In recent years, the volume of life products has
increased quite rapidly as the consumer has become aware that the Italian Social Security System
benefits will have to be supplemented by individual savings and as insurance awareness has
increased through advertising campaigns and the distribution of insurance products through the
extensive branch banking system of the country.

U.S. companies are expected to take advantage of greater opportunities in Italy due to the
liberalization of the EU insurance services market, as well as to the newly introduced Italian tax
incentives for insurance covers involving individual supplemental allowance and long-term care
plans.

Foreign influence and industry consolidation in the Italian insurance industry is expected to rise
due to the adoption of the euro and the emerging willingness of Italian companies to mount
hostile takeover bids. Much of the new merger-mania expected to sweep Italian insurance is
projected to come from the banking sector as banks continue to expand their interests in
insurance sales.

Top Insurance Companies in Italy

1. Agenzia Immobiliare Desidera

2. GRUPPO ASSITECA
3. Gruppo Smile
4. ISVAP
5. Italy Investigator Italian Detective Bodyguard Investigative Investigation Services
6. Rastelli Assicurazioni
7. Rastelli Assicurazioni
8. Studio Scaglione
9. The Italian Association of Loss Adjusting Experts
10. UMS GENERALI MARINE: The number one in marine transport insurance

Banking system in Italy

The Banca d'Italia, the central bank, was the sole bank of issue and exercises credit control
functions until Italy's accession to the European Central Bank, which now controls monetary
policy and the euro, the EU's common currency (excepting the United Kingdom, Denmark, and
Sweden). La Banca d'Italia is still responsible for controlling domestic inflation and balance of
payments pressures.

In 2002, five banks are of nationwide standing: Intesa-Bci, San Paolo-IMI, the Banca di Roma,
Unicredito Italiano, and the Banca Nazionale del Lavoro.

Major international banks with branches in Italy are Chase, Citibank, Bank of America, HSBC,
and others.
The Istituto Mobiliare Italiano is the leading industrial credit institution; it also administers
important government industrial investments. In 1987, the government privatized Mediobanca,
another major industrial credit institution.

A new banking law was passed in 1993, to bring Italy into conformity with the EU's Second
Banking directive, which lead to model of universal banking. It allows banks to hold shares in
industrial concerns; and it eliminates the distinction between banks (aziende di credito) and
special credit institutions (aziende di credito speciale), thus allowing all banks to perform
operations previously limited to specific types of intermediary.

Foreign trade: According to the Banca d'Italia (the central bank), the value of exports of goods
(fob) was €366bn (US$501bn) and imports (fob) €364bn in 2007. The current-account balance
showed a deficit of €36.6bn (2.4% of GDP).

Major exports 2007 % of Major imports 2007 % of

total total
Mechanical machinery 20.8 Energy minerals 14.0
Metals & metal 12.0 Metals & metal 13.4
products products
Transport equipment 11.4 Transport equipment 12.8
Chemicals 9.5 Chemicals 12.8

Leading markets 2007 % of Leading suppliers % of

total 2007 total
Germany 12.9 Germany 16.9
France 11.4 France 9.0
Spain 7.4 Netherlands 5.5
US 6.8 Belgium 4.3
EU27 60.1 EU 27 57.0

FOREIGN RELATIONS
Italy was a founding member of the European Community--now the European Union (EU). Italy
was admitted to the United Nations in 1955 and is a member and strong supporter of the North
Atlantic Treaty Organization (NATO), the Organization for Economic Cooperation and
Development (OECD), the General Agreement on Tariffs and Trade/World Trade Organization
(GATT/WTO), the Organization for Security and Cooperation in Europe (OSCE), and the
Council of Europe. It chaired the CSCE (the forerunner of the OSCE) in 1994, the EU in 1996,
and the G-8 in 2001 and served as EU president from July to December 2003. Italy began
serving a two-year term on the UN Security Council in January 2007.

Italy firmly supports the United Nations and its international security activities. Italy actively
participated in and deployed troops in support of UN peacekeeping missions in Lebanon,
Somalia, Mozambique, and Timor-Leste and provides critical support for NATO and UN
operations in Afghanistan, Bosnia, Kosovo, and Albania. Italy, under NATO's ISAF, maintains
approximately 2,500 troops and a Provincial Reconstruction Team in the western Afghanistan
province of Herat. In December 2006, Italy completed the deployment of some 3,000 troops who
supported international efforts to stabilize Iraq and continues to support reconstruction and
development assistance of the Iraqi people through humanitarian workers and other officials,
particularly in Dhi Qar Province. Currently over 8,000 Italian troops are deployed, including
2,250 in Kosovo, 2, 350 in Lebanon as part of UNIFIL, and over 2,500 in Afghanistan.

The Italian Government seeks to obtain consensus with other European countries on various
defense and security issues within the EU as well as NATO. European integration and the
development of common defense and security policies will continue to be of primary interest to
Italy.

Exchange rate system in Italy

In March 1979, Italy became a founder member of the European Monetary System (EMS) and its
Exchange Rate Mechanism (ERM). During the first ten years of its membership, the lira was
allowed to diverge by up to 6% against other member currencies before action had to be taken,
compared with2.25% for other ERM currencies

Entry into the mechanism, the Maltese lira will be pegging to the euro from the current basket
arrangement. Moreover, the Maltese authorities have declared that they will maintain the
exchange rate of the Maltese lira at the central rate against the euro as a unilateral commitment,
thus placing no additional obligations on the ECB.

Conclusion

Italy in itself is continuously changing and adapting to the various needs and demands of the
world. Changes like liberalization of public sectors in 2006 and decrease in the corporate tax rate
form 33% to 27.5%, betterment of banking and insurance policies have not gone unnoticed.

Increase in the debt securities by 25 EUR billion while a decrease in the equities by 22 EUR
billion portray mixed reactions.

Investment in insurance sector has a potential growth much of the new merger-mania expected to
sweep Italian insurance is projected to come from the banking sector as banks continue to
expand their interests in insurance sales and the awareness amongst the public has seen a
significant rise.

The political conditions and slower economic growth ac compared to other European nations are
factors that make any investor think twice, while positive reforms and measures to develop the
country are sure indicators of better times.