This website uses cookies in order to improve user experience. If you close this box or continue browsing, we will assume that you are happy with this. For more information about the cookies we use or to find out how you can disable cookies, see our Cookies Notice.

Renzi resigns

Renzi and his reform agenda have clearly suffered a setback. Italy will probably muddle through, limiting the capital-market fall-out.

In the end, it was not even close. Some 59% of voters rejected a wide-ranging package of constitutional reforms. If approved, the new arrangements would have centralized more powers in Rome and shrunk the upper chamber of Italy’s parliament while limiting the Senate’s powers.

As the scale of the defeat became clear, Italian Prime Minister Matteo Renzi promptly resigned.

There are three lessons investors should draw.

First, polling has been much maligned this year, in the aftermath of the Brexit vote and Donald Trump’s victory. These reactions were misguided. It would be equally misguided to praise Italian pollsters for their clairvoyance. Italian polls consistently showed “No” ahead, but with some 20 – 25% of voters undecided. Based on this data the “No” blow-out we actually saw was about as plausible as a narrow “Yes” win. Ahead of next year’s heavy electoral calendar, this should serve as a useful reminder not to read too much into polling results, but not to dismiss them either. Polls need to be interpreted with care and can rarely give you certainty.

Second, political change rarely happens overnight. Initial hopes of Renzi swiftly curing the Italian disease were overdone, but so would be despair following his departure from the Palazzo Chigi, the official residence of Italy’s Prime Minister. For now, we consider a snap election very unlikely, at least until the constitutional court weighs in on the new election law early next year. This would ensure that the winning party gets at least 54% of the seats in the lower house of Italy’s parliament. An incoming transition government might well amend this, to make it more favourable to coalition government.

Third, it is not “all about politics.” Already, the market focus is shifting back to the ailing Italian banking sector and the upcoming announcement by the European Central Bank on Thursday and the potential prolongation of quantitative easing (which remains our base case). Monte dei Paschi di Siena continues its scramble to raise capital from private investors, but chances of a quick fix continue to look remote.

Market implications

With all that in mind, we are not surprised by the fairly measured market reactions to the political turmoil so far. On currencies, much of the initial euro weakness has already reversed. On Italian sovereigns, we may not have seen the worst yet, but this could potentially offer attractive entry points. Corporate bonds are likely to remain well-supported by monetary policy. As for equities, keep in mind that the market capitalisation of the Italian equity market as a whole is less than half of that of Apple Inc. alone. That said, we remain strongly underweight in Italian banks.

In the longer term, we would argue that the failure to pass Senate reform has made big changes to the status quo less likely - in either direction. On the one hand, it means market-friendly, structural reforms remain as hard as they have been for decades. Renzi and his reform agenda have clearly suffered a setback. On the other hand, any Five Star led government would find legislating as difficult as its predecessors. This would make it harder to push a Eurosceptic agenda, were Five Star to win the next election.

Related Articles

Jul 19, 2018 New CIO View QuarterlyFocus Topic

Making finance sustainable

The march towards sustainable finance looks unstoppable.

Jul 19, 2018 New CIO View QuarterlyMacro Outlook

Fasten your seatbelts

The outlook for the global economy continues to look solid, but risks are growing.

Jul 19, 2018 New CIO Special

Dollar pros and cons

The dollar has already reached our target. Currently, the arguments are balanced.

Jul 19, 2018 New CIO View QuarterlyMulti Asset

The long late cycle

Still, the good economy just about trumps bad politics – and we remain optimistic.

Jul 19, 2018 New CIO View QuarterlyEquity

Cautiously optimistic

For the time being we are focusing more on sectors than countries.

Jul 19, 2018 New CIO View QuarterlyFixed Income

Goodbye Goldilocks

Tail risks are increasing, but selective opportunities remain.

Jul 19, 2018 New CIO View QuarterlyLetter to Investors

Different worlds

The economy is humming. But we are becoming more cautious. Politics are to blame.

Jul 19, 2018 New CIO View QuarterlyForecasts

Our forecasts

All forecasts at a glance

Jul 16, 2018 New Americas CIO View

Americas CIO View

How much Value is to be found abroad?

Jul 03, 2018 Investment Traffic Lights

Investment Traffic Lights

Our tactical and strategic view

Jun 29, 2018 Chart of the week

Chart of the week

Do weak currencies hurt emerging markets?

Jun 21, 2018 Macro Outlook

Ten years after

The long reach of the financial crisis

Jun 15, 2018 Americas CIO View

Americas CIO View

Inflation: Sometimes it skips a generation

Jun 15, 2018 Chart of the week

Chart of the Week

Looking at real federal funds rates, not a lot has happened after 7 hikes

Jun 08, 2018 Americas CIO View

Americas CIO View

Is it time for U.S. Small Caps to shine? If you pick them right

Jun 04, 2018 Investment Traffic Lights

Investment Traffic Lights

Our tactical and strategic view

Jun 01, 2018 Chart of the week

Chart of the Week

Why emerging markets may be less vulnerable than they used to be

May 29, 2018 CIO Flash

Euro crisis 2.0?

Italy's political woes are dragging down markets while boosting our dollar call.

Feedback

Please let us know what you think about this article/page.