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

Apr 17, 2018 New Focus Topic

Rising interest rates

Will rates unrattle equity markets?

Apr 17, 2018 New Macro Outlook

As good as it gets?

So far, our upbeat base case for the global economy is looking good

Apr 17, 2018 New Multi Asset

Managing volatility

The markets' increased volatility should be manageable.

Apr 17, 2018 New Letter to Investors

One more year

Markets are shaky, but a bear market is unlikely without recession.

Apr 17, 2018 New Forecasts

Our forecasts

All forecasts at a glance

Apr 16, 2018 New Fixed Income

Pockets of opportunity

We continue to see opportunities, especially in high yield. Buy the dips.

Apr 16, 2018 New Equity

Hold your nerve

Based on our growth and interest-rate forecasts, we remain bullish on stocks.

Apr 16, 2018 New Equity

Americas CIO View

Economic EPS growth: Does any region have it this cycle?

Apr 11, 2018 Equity

Americas CIO View

Welcome earnings season: 1Q S&P EPS growth likely 20%+

Apr 03, 2018 Investment Traffic Lights

Investment traffic lights

Our tactical and strategic view

Mar 26, 2018 Chart of the week

Chart of the week

Another rate hike done, a few more to go

Mar 19, 2018 Multi Asset

Normality for volatility

Goldilocks economy showing cracks, volatility on the rise – but not too sharply.

Mar 16, 2018 Chart of the week

Chart of the week

The close relationship between stock prices and corporate earnings

Mar 09, 2018 Chart of the week

Chart of the week

There is less to the stunning populist upsurge in Italy than meets the eye.

Mar 01, 2018 Investment Traffic Lights

Investment traffic lights

Our tactical and strategic view

Feb 27, 2018 Macro Outlook

An Italian muddle

Italy's looming election could prove a lot messier than markets think.

Feb 23, 2018 Chart of the week

Chart of the week

Valuation multiples for the S&P 500 are stretched

Feb 16, 2018 Chart of the week

Chart of the week

Scared about rising inflation? If so, keep calm for now!

Feedback

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