Register free for our breaking news email alerts with analysis and cutting edge commentary from our award winning team. Registration only takes a minute.

Eight asset managers on Italy's political crisis

Italian stocks and bonds have suffered a big market sell-off as the country’s leaders struggle to avoid a political crisis.

Italian stocks and bonds suffered a big market sell-off yesterday as the country’s leaders continue to struggle to avoid a political crisis.

Yields on two-year bonds reached 2.73%, the highest in four years, while the yield on 10-year debt spiked 30bps from the close of trading the previous day.

Italian equities also felt the heat, with the FTSE MIB index falling by as much as 3% in early trading on Tuesday.

That followed president Sergio Matarella's veto of Eurosceptic Paolo Savona as candidate for finance minister as the two main winners of the elections in March – the anti-globalist Five Star Movement and rightwingers The League – attempted to form a coalition government.

Outraged at the veto, the two populist parties refused to put forward another candidate, putting the country on course for a new election, which could return an even more eurosceptic result.

With the eurozone banking system now looking increasingly exposed and equity markets globally feeling the heat of risk aversion, we asked a series of managers what could come next.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Italian stocks and bonds suffered a big market sell-off yesterday as the country’s leaders continue to struggle to avoid a political crisis.

Yields on two-year bonds reached 2.73%, the highest in four years, while the yield on 10-year debt spiked 30bps from the close of trading the previous day.

Italian equities also felt the heat, with the FTSE MIB index falling by as much as 3% in early trading on Tuesday.

That followed president Sergio Matarella's veto of Eurosceptic Paolo Savona as candidate for finance minister as the two main winners of the elections in March – the anti-globalist Five Star Movement and rightwingers The League – attempted to form a coalition government.

Outraged at the veto, the two populist parties refused to put forward another candidate, putting the country on course for a new election, which could return an even more eurosceptic result.

With the eurozone banking system now looking increasingly exposed and equity markets globally feeling the heat of risk aversion, we asked a series of managers what could come next.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Fabrizio Quirighetti

Chief investment officer and co-head of multi-asset at SYZ

The recent change in attitude of the Italian populist-extremist coalition towards the euro has triggered the current crisis.

Until mid-March, the campaigns and narratives of the Five Star and Lega parties were primarily focused on immigration, and thus had almost no impact on markets.

Given the magnitude of the jump in Italian government bond yields over the last few days, we can really speak about a crisis.

The markets are reacting normally for a crisis, with safe-havens including German bunds, US treasuries, USD, CHF and JPY flying higher, while equities and credit are under pressure, especially if related more or less directly to Italy and Europe.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Darren Williams

Director of global economic research at AllianceBernstein

We expect president Mattarella to attempt to form a technocratic government led by Carlo Cottarelli—an ex-IMF official who, during an earlier stint in government, became heavily associated with budget cuts.

Cottarelli will likely present a programme to parliament aimed at passing a budget and taking Italy through to elections in 2019. But as he has little/no chance of winning a confidence vote, the overwhelming likelihood is that there will be another election this year, probably in September or October.

While the market may find some temporary respite at current levels, it’s hard to see this as a buying opportunity given the scale of the underlying risks and the lack of an identifiable positive catalyst.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Andrea Iannelli

Investment director, Fidelity International

Economic growth has been positive since 2013, the current account deficit has been in surplus for five years, and the fiscal deficit has more than halved since its 2009 peak.

Corporate fundamentals have improved considerably in the past year, and the national champions among Italian banks have worked hard to improve their capital position, selling non-performing loans and improving profitability and margins.

This helps to explain why risk premia, for example those reflected in bond spreads, have been rising but remain, at least for now, well below the levels recorded in 2011-2012, when Italy, along with much of the rest of Europe, was in recession.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Charles St-Arnaud

Senior investment strategist, Lombard Odier

This situation is reminiscent of the events that rattled Greece in 2015 following the election of the Syriza government. However, Italy is the third-largest economy in the Eurozone.

And with Italian government debt accounting for a little more than 20% of the total government debt issued by Eurozone countries, together with Italy’s sizeable banking system, the stakes are higher.

While the new Italian government’s policies are likely to create friction with the EU and to increase uncertainty over whether Italy might leave the euro, we believe at this point that it will not lead to a major crisis. That said, investors would be ill-advised to ignore the issue.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Hao Ran Wee

Investment strategist, Barclays

The populist parties’ economic programme called for all sorts of goodies such as a universal basic income, tax reductions, and a decrease in the mandatory retirement age.

This would have only fuelled Italy’s already massive debt pile, which currently stands at a worrying 130% of GDP – the second largest in Europe behind Greece.

Under a piece of EU law known as the Growth and Stability Pact, no EU country is allowed to have its budget deficit exceed 3% of GDP, and all EU countries are required to keep their public debt levels at a maximum of 60% of GDP.

Italy’s populists seem intent on sending a signal to the EU that they will not be thwarted in determining their own economic policies, however fanciful.

If the EU objects too much, Italy’s populist leaders will attempt to spook the EU and markets with veiled threats to attempt to exit the eurozone.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Luke Hickmore

Senior investment manager, Aberdeen Standard Investments

Italy’s problems are endemic and many never went away after the euro crisis.

Bond markets have treated it more favourably because they thought the worst of their fears back then would not come true. Those fears are back but the problems never really went away.

The lesson is that investors’ will continue to worry until they are given reason not to. Last time, that meant Mario Draghi saying he will do anything to protect the euro. We are a way off him having to say something similar but his words probably won’t work twice.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Jake Robbins,

Senior investment manager, Premier Global Alpha Growth fund

In this environment, volatility can create some excellent investment opportunities as many assets inevitably get mispriced in distressed markets.

Whilst Italian businesses tied into the local economy, such as banks, look particularly vulnerable, given wider uncertainty across the EU (let’s also not forget Brexit), then financials, real estate and domestic cyclicals, such as retailers, across the entire continent may find the going tough for a while.

But for the brave, those high quality businesses with global franchises that can continue to benefit from strong global growth could present good opportunities to invest during the turmoil.'

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Stephen Jones,

Chief investment officer, Kames Capital

This year has seen economic momentum collapse sharply and, perhaps more than coincidentally, populist pressures have brought the fault lines back to the fore.

Equity markets have weakened on these changes but Italian worries have largely reinforced a trend already in place.

These risk markets setbacks have, however, taken the steam out of rising short rate and long yield forecasts and will probably succeed in ensuring that quantitative easing is continued in Europe for longer than might otherwise have been the case.

When the dust settles, this should underpin equity markets, allowing progress to be made afresh and from safer levels; the positive earnings outlook offered by analysts have good real-world support.

However, to be clear, this supposes that Italy stops short of turning a drama into a crisis. Those of us of a certain vintage know well enough that Italian politics are not to be trusted.'

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Related Fund Managers

Jake Robbins
Jake Robbins
73/460 in Equity - Global (Performance over 3 years) Average Total Return: 48.33%
Luke Hickmore
Luke Hickmore
6/17 in Bonds - Euro Corporates (Performance over 3 years) Average Total Return: 26.25%
Citywire TV
1 Comment Play Citywire Scotland: how wealth managers use new tech

Citywire Scotland: how wealth managers use new tech

We caught up with a few wealth managers at our annual event in Gleneagles to find out what technological innovations they are employing across their businesses.

1 Comment Play CEO Tapes: Buxton to Gilbert - ‘my Glencore quandary’

CEO Tapes: Buxton to Gilbert - ‘my Glencore quandary’

Do not miss the first two minutes of this film as Richard Buxton shares how he has been challenged by a client for owning shares in a certain company.

Play CEO Tapes: the huge opportunities for asset managers

CEO Tapes: the huge opportunities for asset managers

From tech disruption, retirement and poaching, the CEO discuss the opportunities for their businesses in this episode.

Read More
Wealth Manager on Twitter