European equities breezed through uncertain outcomes of votes in Germany and the Netherlands last year. Now, most investors are betting Italy’s March 4 parliamentary vote won’t be much different.
Even as possible results of the vote include a hung parliament and a strong showing by the euro-skeptic Five Star Movement, investors don’t seem to be panicking. They are encouraged by anti-establishment factions softening their anti-euro rhetoric and a new electoral law that steers parties toward building coalitions, threatening the Five Star’s go-it-alone approach. Italy’s FTSE MIB Index is up 3.8 percent this year, despite a global market rout which has sent the Stoxx 600 down 1.9 percent.
Yet some caution that investors are getting too complacent. Natixis strategists including Sylvain Goyon wrote in a note that they have been “surprised” by the lack of concern, when “the probability of a nasty surprise is by no means zero.” Natixis sees a 10 percent probability of a euro-skeptic coalition winning. This is generally viewed as the most negative possible scenario for equities, followed by a center-right alliance led by the anti-immigration Northern League party.
On the other hand, a grand coalition with former prime ministers Matteo Renzi’s Democratic Party and Silvio Berlusconi’s Forza Italia as the main factions is viewed as the most positive outcome, as they are seen widely continuing with the current pace of economic reforms.
Still, many investors point to recent proof that the region’s stocks are proving immune to volatile politics in the medium-to-long term. Germany’s DAX Index climbed in the five weeks after votes for a right-wing party surged in the country’s federal elections — and stocks were unfazed on the day of a sudden collapse in coalition talks the following month. Similarly, an inconclusive vote in the Netherlands didn’t prevent Dutch stocks from soaring while the country was left without a government for the longest period since World War II.
Below is a round-up of investors and analysts’ views of Italy’s election.
Reyl & Cie
“Lately, investors have become more used to inconclusive results from European elections,” said Marco Bonaviri, a senior portfolio manager at Reyl & Cie in Geneva, Switzerland. “A hung parliament with long talks afterward and even a minority government led by the right wouldn’t have a big impact on the Italian market in the long term. The biggest negative surprise would be a majority led by the Five Star Movement, in which case Italian assets and the euro could suffer. We have low exposure to Italian equities but we are not shifting our strategy based on the election.”
Blue Whale Capital
“Investors are showing unusually high levels of complacency with regards to the probability of these outcomes and very little risk is currently priced in to European financial markets,” fund management firm Blue Whale wrote in a note. “The worst case scenario of a coalition between Five Star Movement and Northern League would be considered a severe threat to the stability of the EU, given the size of Italy’s economy and the stance of both parties on issues such as the fiscal deficit, the euro and immigration.” A coalition in which Northern League emerged as the largest coalition partner — led by their fiercely anti-EU leader Matteo Salvini — “would also present severe challenges.”
Candriam Investors Group
“The context of positive and accelerating growth in the eurozone and a still accommodative ECB mitigates the policy risk of the Italian elections,” said Nadege Dufosse, head of asset allocation at Candriam. She noted that unlike in the French elections last year, “a genuine reform agenda is unfortunately missing in the Italian electoral campaign.”
Union Bancaire Privee
“Market views on Italy remain constructive, as long as the recovery is in place and the banking sector under healing,” according to Chief Economist Patrice Gautry. He noted that even though fears surrounding banks have penalized the market in the past, the outlook has improved and the sector has delivered a strong performance year-to-date. Moreover, Italian companies’ earnings growth looks sustainable, while valuations remain relatively moderate versus other developed and European markets. “Trend on growth should continue to fuel the market performance, unless a major negative surprise comes from the result of these elections.”
“I expect Italy to outperform this year compared to other European indexes, due to the fact that Italy’s economy is finally growing again and it is no longer seen from abroad as the weak link,” said Lorenzo Batacchi, portfolio manager at BPER Banca and an Assiom Forex member. Considering the new electoral law, he sees “a bit of a political obligation for a grand coalition,” which would be viewed positively. He expects the market to be more volatile ahead of the vote as investors hedge and turn slightly more defensive in the short term. An underperformance linked to political risk would be a buying opportunity, he says, as the country is on a stable recovery path and profit growth is set to come in at around 20 percent this year.
Excluding a majority win by the Five Star Movement — an outcome that would lead to volatility but seems unlikely — all other scenarios are not a cause of concern for the market, according to CEO Jacopo Ceccatelli. The lack of well-defined programs makes it hard to evaluate the implications for single stocks, he added. Italian banks, which are still undervalued compared to European peers, would likely be hit in case of a surprise outcome in favor of the Five Star.