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Investment for Expats in Italy

Submitted: April 2014

As in any country, expats must beat inflation and taxes to preserve the real value of their savings.

As regards taxes on capital investment in Italy, they are quite in line with European standards.  At the risk of oversimplifying, you could broadly expect to pay about 20% on your nominal income from capital sources.

Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with Italian inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside the Eurozone but you invest in any Euro-denominated assets, you are effectively making a currency bet.

Inflation in Italy

The European Central Bank (ECB) is strongly committed to price stability, i.e. inflation must be slightly below 2% over the long-term. In practice, the ECB is solely concerned with inflation throughout the Euro-zone, which is nothing more than an aggregate.

Italy has traditionally been a high inflation country, with one of the most contentious industrial relations system ever seen across Europe. When the Euro was introduced, it would have been hard to imagine Italy’s inflation rate below the ECB’s 2% target. This is, however, what actually happened since the 2008 downturn. In March 2014, Italy’s inflation rate stands at 0.34%, i.e. below the Euro-zone aggregate (0.5%).

For more information on monetary policy, see Foreign Exchange for Expats in Italy.

Savings accounts

Savings accounts are risk-free unless a bank goes bankrupt. In any case, Italian deposits are guaranteed by the Deposit Guarantee Fund (Fondo interbancario di tutela dei depositi) up to €100,000.

It’s best to shop around in order to find the right savings account. Feel free to consider term deposits as well. If you do things right, you could get an interest rate above 1%, which is above inflation but below what you could get in many other EU countries. Don’t forget that this is gross interest, so taxes may apply thereon (generally 20%).

Fixed income

Given the poor yields on savings accounts, expats may serious think of investing in fixed-income securities or mutual funds specialised therein (Organismi di investimento collettivo del risparmio – OICR).

The yields on Italian Government debt have strongly decreased over the past year. A 10-year Government bond would get you 3.1%, down from 4.8% in July 2013. Yields have still some room to go further down. By contrast, French 10-year OATs offer 2% whereas German 10-year Bunds will get you no more than 1.5%. Of course, you are likely to find higher yields on riskier corporate bonds.

Government bonds are subject to market variations. Bond prices rise when the market demands a lower yield, and they shrink when the market demands a higher yield. Over the past year, Italian bond investors have made substantial gains because interest rates have gone South. As the Euro-zone is subject to high deflationary risks, the ECB has a strong case to engage in further monetary loosening. Interest rates on the market have therefore some room to move further down.

Italian securities (costs)

Do consider carefully the applicable transaction costs if you wish to trade securities in Italy. Here are the main costs you should be aware of:

  • Broker’s commission fees – generally no more than 0.2%
  • Financial transactions taxes – 0.12% on companies whose market capitalisation exceeds €500m
  • Minimum commission fees – typically below €10, but you should shop around)
  • Maximum commission fees, if any – a regular trader could expect them to be between €20 and €30
  • Any other applicable fees that may be charged by your broker.

Online share dealing is likely to be cheaper than transactions made at your bank branch.

Italian shares (overview)

Italy’s main index is the FTSE MIB. As of today, Italian share prices are still 50% below their 2008 peak in nominal terms. This is because the Euro-zone crisis has forced Italian interest rates higher, not to mention lower Italian corporate earnings. The 2008 and Euro-zone crises have brought considerable volatility on Italian markets as well. Over the past year, interest rates demanded by the market have strongly decreased while prices have risen by around 40%.

It should be noted that many of Italy’s listed companies are struggling to generate profits. For those who do, the market is happy to get a low dividend yield (i.e. rarely more than 3 %). Thus, Italian share investments may be worthwhile only if you believe the company you’re investing in is healthy enough to make more profits in the future. Struggling firms should be avoided, as it can take years for the market to fully/accurately price how bad a company is.

Be wary of volatility when you invest in securities. Volatility is heavily dependent on the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on interest rates. If they are going up, stock prices should go down. At the moment, Italian interest rates are at record low levels, but they might rise if market turmoil resumes in the Euro-zone.

You are responsible for deciding how much risk you want to take on. On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.

Financial returns

From a financial point of view, the real return on investment consists of:

  • Net dividend or coupon yields
  • + Net capital gains (or losses)
  • -  Taxes
  • -  Inflation

When a company reinvests its business profits, the net dividend yield is lower but this may be offset by higher capital gains potential over the long run. Technically speaking, an investment can be highly profitable despite low coupon/dividend yields if the interest rate demanded by the market edges further down (Italy’s case over the past year), or if the market expects a higher dividend in the future.

As far as Italian shares are concerned, their prices have risen so high over the past year that profit perspectives are not encouraging.

Investing outside Italy

It’s perfectly fine if you park your investments outside Italy, but you will have to report them to the Italian taxman. A 0.2% annual tax on foreign financial assets (IVAFE) will then apply.

This is all, of course, only if you are resident in Italy for tax purposes.

 

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