Milan stock exchange makes for a Wild West market

It's a normal morning on the Milan bourse, a few stocks ticking up and down like tumbleweed rolling across the screen at the start of a spaghetti western film.

Suddenly a bank, a publisher or a manufacturer shoots five per cent higher for no immediately obvious reason and starts a trading stampede that would startle even the toughest cowboy.

Welcome to Wild West Italy. In recent months, the Milan stock market has been spattered with sudden share spurts on speculation that corporate raiders are closing in on companies and playing for power in the "salotto buono", the cosy club of Italy's financial elite.

In one day last week, influential merchant bank Mediobanca suddenly leapt seven per cent to a seven-year high. Before that it was Fiat's turn to jump about six per cent. But that was nothing in light of RCS Mediagroup's almost 40 per cent climb in the space of three weeks.

"It really is gun-slinging in the Wild West," said a hedge fund manager in London, who declined to be named.

Just like playing poker in swing-door saloons, there are plenty of quick bucks to be made on Milan's market. But you can also get killed if you're caught out of the loop when a big rumour comes riding into town.

Recently, the six syllables "Stefano Ricucci" have been enough to fuel huge stock rises as investors rush to get alongside the property developer-cum-corporate raider, knowing his high profile buying methods tend to boost any stock.

Mr Ricucci has struck gold, buying RCS at an average of €3.8 a share and seeing his name drive it to current prices of €5.74. His stake is now worth about €763 million.

Questions of whether he is a front man for a hidden investor or whether the balance of power in Italian finance is shifting are part of the daily froth of rumours over morning cappuccinos.

While few markets have offered such speculative appeal since the end of the tech boom in 2000, investors say the fundamentals show that few Italian stocks are good long-term investments.

"The rumours and volatility are not a problem, it's one of the reasons people go to Italy," said Rolf Elgeti, European strategist at ABN AMRO.

"But going forward, profitability is the key concern and the structural problems of Italy's labour market and their effect on margins is the real reason people steer clear of Italy."

Investors and traders said Italian stocks were being held up at around four-year highs by hopes of merger activity, especially in the financial sector where two banks are being fought over by foreign bidders and Italian investors keen to keep control.

By contrast Italy is in recession. Exports - once the mainstay of the economy - are losing out to cheap Chinese goods, labour costs are high and business confidence is as gloomy as a Milanese winter, moping around at a three-year low.

That puts the pressure on fund managers and individual investors to pick their way carefully through the sexy stories and speculation to find stocks that really are worth holding.

Oil and gas major Eni and power giant Enel are still favourites, pumping out healthy dividends and expanding in slow but steady sectors.

Even here though, Italy's notoriously meddling politicians can rock share prices as happened when the government switched Eni's CEO last month, knocking the stock lower.

Shareholders clubbing together in pacts to control firms with small stakes or Chinese boxes of holding companies are common even at blue-chip companies like Telecom Italia and RCS, giving single investors disproportionate sway.

Many large Italian banks are seen as potential restructuring gems if management can cut their infamously bloated costs while slightly riskier bets are found in a bevy of mid-tier financial groups seen as possible takeover targets.

So if funds miss out on a 10 per cent leap because of a rumour, so be it, they say. Some funds prefer to track the index now, rather than risk being stung on single stocks.

"There isn't an acceptable risk-reward for getting involved in these situations," said Adrian Varley, a senior investment manager at Gartmore.