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

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LONDON, Feb 17 (Reuters) - Mario Draghi’s appointment as Italy’s prime minister will provide a big boost to the country’s financial markets, Morgan Stanley said on Wednesday, predicting a major improvement in the country’s closely-watched bond spreads and a double-digit outperformance by its stock market.

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

Morgan Stanley said the halo effect would narrow the BTP bond spread - the premium investors demand to hold Italian government bonds rather than AAA-rated German debt - to 85 basis points by June from its current 90 bps spread. In an optimistic case, it could fall to 55 bps before the end of the year.

For stocks, the bank predicted MSCI’s Italy index would outperform MSCI EMU by 10-15% led by banks. Overweight-rated stocks include: Unicredit, Mediobanca, ENEL, Stellantis and Prysmian.

“PM Draghi’s government is a significant positive catalyst for Italian equities, which are trading close to a record valuation 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 the expected economic rebound from the COVID-19 pandemic, Morgan Stanley said, adding that a more than 30% outperformance was “not implausible”.

MSCI’s Europe stocks index is currently trading at a discount to its All-Country World Index excluding the United States for the first time since 2013.

“Draghi’s appointment could spark renewed interest in the region from global investors, as happened around (Emmanuel) Macron’s election victory in France in 2017,” Morgan Stanley said.

Reporting by Marc Jones; Editing by Tom Arnold and Gareth Jones