UPDATE 1-Draghi effect to drive surge in Italy's financial markets - Morgan Stanley

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By Marc Jones

LONDON, Feb 17 (Reuters) - Mario Draghi's appointment asItaly's prime minister will provide a big boost to the country'sfinancial markets, Morgan Stanley said on Wednesday, predictinga major improvement in the country's closely-watched bondspreads and a double-digit outperformance by its stock market.

Draghi, a former European Central Bank chief feted inItalian media as a national saviour, promised sweeping reformsto help rebuild Italy in a speech to the Senate on Wednesdayahead of a mandatory confidence vote in his government ofnational unity.


Morgan Stanley said the halo effect would narrow the BTPbond spread - the premium investors demand to hold Italiangovernment bonds rather than AAA-rated German debt - to 85 basispoints by June from its current 90 bps spread. In an optimisticcase, it could fall to 55 bps before the end of the year.

For stocks, the bank predicted MSCI's Italy index wouldoutperform MSCI EMU by 10-15% led by banks. Overweight-ratedstocks include: Unicredit, Mediobanca, ENEL, Stellantis andPrysmian.

"PM Draghi's government is a significant positive catalystfor Italian equities, which are trading close to a recordvaluation low versus EMU," Morgan Stanley's analysts said.

Europe's long-suffering banking sector could do even better.

Improving perceptions around Italy could dovetail with theexpected economic rebound from the COVID-19 pandemic, MorganStanley said, adding that a more than 30% outperformance was"not implausible".

MSCI's Europe stocks index is currently trading at adiscount to its All-Country World Index excluding the UnitedStates for the first time since 2013.

"Draghi's appointment could spark renewed interest in theregion from global investors, as happened around (Emmanuel)Macron's election victory in France in 2017," Morgan Stanleysaid.

(Reporting by Marc Jones; Editing by Tom Arnold and GarethJones)