Contrarian Opportunities in Italian Construction: Why Now is the Time to Build

The Italian economy is at a crossroads, with its services sector roaring ahead while its construction sector stumbles—presenting a rare contrarian investing opportunity. While the HCOB Services PMI surged to 53.2 in May 2025, its construction counterpart dipped to 49.2, marking contraction for the first time in three months. This divergence masks a deeper truth: construction stocks are undervalued and poised for recovery, while services face hidden risks. Here's why investors should lean into construction now and tread carefully with services.

The Construction Contraction: A Buying Opportunity in Disguise

The May 2025 construction PMI dip to 49.2 reflects sectoral imbalances, not systemic failure. While residential and civil engineering segments contracted, commercial construction grew for a second straight month, driven by demand for office and retail spaces in urban hubs like Milan and Rome. This resilience is critical: commercial projects often tie into Italy's €200 billion National Recovery and Resilience Plan (PNRR), which prioritizes infrastructure and tech upgrades.

Key drivers for construction's rebound:1. ECB Rate Cuts: Expectations of easing monetary policy (the ECB's deposit rate is projected to drop to 2.5% by year-end) will lower borrowing costs for construction firms and households, boosting affordability for housing and commercial projects.2. Supply Chain Relief: Input cost pressures eased in May, with raw material prices dropping sharply—the steepest decline since early 2024. This reduces cost burdens for firms like Salini Impregilo (BIT: SIE) and Webuild Group (BIT: WEB), which dominate infrastructure projects.3. Fixed-Term Hiring Surge: Employment in construction rose at its fastest pace in 2025, signaling demand for labor tied to new projects. While temporary contracts dominate, this hiring spree suggests underlying confidence in future workloads.

The Services Sector's Hidden Risks

While services firms like Enel (ENEL) and Terna (TRN) enjoy strong demand, their growth faces three critical headwinds:1. Export Declines: Services export orders have now contracted for 10 consecutive months, with May's drop the sharpest since January 2024. Weak global demand—especially in EU markets—threatens sectors like tourism and logistics.2. Inflation Pressure: Input costs in services rose at the fastest pace in over a year, driven by energy and wage hikes. Firms are passing these costs to consumers, risking demand destruction.3. Structural Overreliance on Domestic Demand: Services now account for 70% of Italy's GDP, but this concentration amplifies vulnerability to domestic policy shifts (e.g., tax hikes) or consumer confidence dips.

Contrarian Investing: Go Long on Construction, Short on Services

Top Construction Picks:- Webuild Group (WEB): A leader in infrastructure, Webuild benefits directly from PNRR projects. Its valuation at 7.2x 2025E EV/EBITDA is cheap relative to its growth prospects.- Salini Impregilo (SIE): Specializes in high-margin international projects, diversifying its risk. Shares trade at 6.8x EV/EBITDA, with a 4.2% dividend yield.

Avoid Services Stocks with Export Exposure:- Terna (TRN): While strong in domestic energy infrastructure, its 30% reliance on exports to EU markets makes it vulnerable to trade frictions.- Enel (ENEL): Despite its renewable energy dominance, its valuation at 12.5x P/E is stretched given slowing export demand and regulatory risks.

The Bottom Line: Build Now, Avoid Services Later

The construction sector's current dip is a buying opportunity for investors with a 12–18 month horizon. With ECB support, PNRR funding, and commercial demand stabilizing, construction PMI could rebound to 51.1 by 2026, outperforming its historical average. Meanwhile, services' reliance on domestic demand and export fragility make it a sector to avoid as global growth slows.

Action Items:- Long: Webuild Group (WEB), Salini Impregilo (SIE)- Short: Terna (TRN), Enel (ENEL) if valuations stay elevated- Watch: ECB policy decisions and PNRR disbursement timelines

In an economy where growth is uneven, construction's undervaluation is a gift. The time to build your portfolio in this sector is now.