Just like in the recent elections in Germany and Austria, Italy’s anti-establishment groups Five Star Movement and the Northern League surged – or “are on fire” as Barclays put it – in Sunday’s election as voters punished the mainstream parties for years of economic decline, rising taxes and a wave of immigration, casting doubt over the country’s future political direction.
While final results are still due, preliminary results released by Italy’s interior ministry show the center-right coalition winning about 37% of the parliamentary vote & the 5-Star Movement getting about 31%, with the center-left coalition far behind with 23%, prompting former Prime Minister, PD’s Matteo Renzi, to announce his resignation as party leader. Negotiations to form govt will likely be long & fraught.
According to some pundits, the vote outcome was the worst possible, and the resulting hung parliament will lead to “prolonged deadlock and eventual snap polls” resulting in policy paralysis and protracted uncertainty, i.e., “The Ugly (II)” outcome laid out below.
Still, according to Wall Street the outcome was not too shocking and certainly not a reason to dump one’s Italian exposure just yet. Courtesy of Bloomberg, below is a round-up of investors and analysts’ views of Italy’s election.
- The official result of the Italian general election is yet to be announced. We expect a formal announcement later this morning. The latest electoral projections suggest that no major party or electoral coalition will win an absolute majority of seats in the Lower House and Senate. We expect a bumpy and potentially long period before a new government is in place. In the meantime, the current government will remain as a caretaker. The formation of a new government will come only after a period of negotiations among all political forces. New elections, perhaps in a year’s time, could also be a possibility.
- In our view, the inconclusive Italian vote has negative “medium-term” implications for stability in the Euro area and thus for markets. Even though the prospect of a caretaker government could diffuse tensions for now, the Italian vote suggests little appetite for economic policies that would keep the Italian fiscal deficit under the 3 percent Maastricht limit, for example. This will create tension between Italy and its European partners. More generally, the composition of the new Parliament will not be seen as favourable by those partners, especially in northern Europe. We expect the northern Europeans to demand more risk reduction at the national level before further steps towards integration and risk sharing can be made across the EU. The Italian Parliament will likely oppose the former.
- Equity strategist Mislav Matejka writes in note: “Italy remains our top country pick, and we would use any politics-driven softness as an opportunity to add.”
- “With no absolute majority emerging, the parties have the option of negotiating a coalition – an uncertain process,” economist Daniele Antonucci says in note. “Policy continuity looks likely while this happens, but limited reforms could leave the economy vulnerable when the cycle turns.”
JPMORGAN ASSET MANAGEMENT
- The results were partly in line with expectations, while also some surprises with potential implications for markets also emerged, market strategist Maria Paola Toschi says. “The market reaction was very muted this morning, with the BTP showing a moderate move.” The reasons may partly be due to some aspects of the outcome already being incorporated by investors such as low governability, no majority and the need for additional consultation/coalitions. Still, “the extreme scenario of a populist government seems a remote possibility, which is good for markets.”
- “Anti-establishment parties did better much better than expected, something which should not be taken positively by the market,” CEO Jacopo Ceccatelli says. He sees “a mild negative reaction” with some weakness and volatility, though would be surprised “if huge or very significant.”
- While the election hasn’t not brought to an outright majority as expected, the biggest surprise was the stronger-than-expected results of anti-establishment Five Star and Lega, “something that is unlikely to please the market and EU partners,” analysts Javier Suarez and Andrea Filtriwrote in a note. They expect some short-term volatility with defensive sectors (utilities & infrastructure, consumers & towers) outperforming high beta/pro- cyclicals sector (banks and industrials)
- “We expect lengthy negotiations after these elections, which may lead to increased volatility of Italian assets,” Matteo Ramenghi, chief investment officer at UBS Group AG’s wealth management unit in Italy, said in a note. A broad grand coalition would be well received by markets as it could result in political stability and fiscal discipline while repeat elections could prolong uncertainty and weigh on Italian assets. He added that the Italian equity market hasn’t priced in electoral uncertainty, though current yields on government bonds suggest they have incorporate some political risk.
MAKOR CAPITAL MARKETS
- It seemed clear that we would end up with a hung parliament, strategist Stephane Barbier de la Serre said. “Given that we’re still waiting for the final numbers, it’s too early to draw any conclusion in terms of market impact because we don’t know much at this point. But all in all, I don’t think this will be a game changer for Italy, and that’s what’s matters for markets.”
- Populist parties performed strongly, while no single coalition seems able to reach a majority, chief strategist Jan von Gerich said. Financial markets are expected “to show some worries but no bigger panic ahead.” While the Five Star and the League did better than expected, the chances of these two parties forming a government are “remote, so market worries should be only limited for now.” The positive cyclical momentum in the economy and continued ECB support “act as a buffer.” Confirmation of a grand coalition government from Germany is positive factor for financial markets and also diminishes the net market impact. Still, expects to see some worries especially in Italian government bond markets and equity markets.”
- Anti-establishment forces are “on fire” while the prospects for a government are very uncertain, economist Fabio Fois said. He expect “a wide and heterogeneous” coalition that could include anti-system parties, which is unlikely to deliver “meaningful” structural reforms, and, depending on its composition, there are risks that previous reforms could be unraveled.