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Market volatility warning ahead of Italian elections

Will James, who runs a £1 billion portfolio of European shares at Standard Life Investments, warns over return of volatility.

 
Market volatility warning ahead of Italian elections

One of Europe’s most consistent investors has warned of a return to high stock market volatility ahead of elections in Italy this weekend.

‘I do think volatility, although it has fallen significantly, has every chance of picking up again, especially with regards to potential worries about the elections, both in Italy, but also Germany later in year,’ said Will James, who runs a £1 billion portfolio of European shares at Standard Life Investments.

James’ comments come ahead of this Sunday’s Italian elections. Centre-left Pier Luigi Bersani is ahead of centre-right Silvio Berlusconi in the polls to lead the recession-struck European country, but many voters remain undecided.

Bersani is potentially expected to form an alliance with current leader Maio Monti, in a result that would likely be most welcome by the market.

A victory for anti-austerity Berlusconi would likely spook investors, with analysts warning that Italy’s international credibility would decline alongside its programme of reforms.

Analysts at banks including Morgan Stanley have warned that domestic European stocks, which have outperformed in recent months, are at particular risk from the Italian elections.

Societe Generale analyst Michala Marcussen predicted in a research note that ‘removing the tail risk of a Berlusconi win could bring some short-term relief. How durable this would prove will then depend on the ability of the new government formed to agree and advance on a structural reform programme’.

Despite his warning over a renewed bout of volatility, James, a Citywire A-rated fund manager who has steered his European Equity Income fund to 42% returns over the past three years (versus an average of 28% from competitors) was upbeat about the prospects for Europe.

‘Yes, we’re potentially through the worst in terms of the sovereign debt crisis, it is being tackled. The market has got more confidence that the politicians and policymakers know what is going to happen.’

James is overweight on Northern European companies, with just 3.9% of his fund invested in Italy. However, he insists that his holdings reflect individual stock selections.

‘Growth will remain low. I don’t think there’s any reason to suggest were going to get a growth surprise', he said. 'That said, European companies have some very good exposure to wider drivers of the global economy, whether it be the US which appears to be recovering or Asia where we see decent growth opportunities and where our companies are well exposed. ‘

James, who is overweight on the consumer services and telecoms sectors in Europe, said any volatility form the elections would present an opportunity to buy dividend-paying shares.

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