James de Bunsen, portfolio manager with Janus Henderson’s UK-based Multi-Asset Team, gives his view on the Italian election results.
While there is no clear winner from this latest Italian election, the clear loser is the mainstream domestic political establishment and those in favour of closer European integration.
Given that no party won enough seats to form a majority, and that none of the main gainers on the day seem natural bedfellows in a workable coalition, it means that we are really none the wiser in terms of who will be running the country going forwards. Even though the Five Star Movement reversed its stance on exiting the single currency recently, there is now a decidedly less constructive tone towards the European Union (EU) emanating from its soon-to-be third largest economy. This is a major blow to the Macron plan for deeper EU integration.
We see the implications for markets as remaining more long term than short term. Equity markets and bond spreads are, at the time of writing, reflecting a higher risk premium for Italian assets, given the uncertain outcome and the gains made by less familiar/predictable anti-establishment parties. However, we believe the real issues in Italy are ones that investors have been aware of for many years: unsustainable levels of debt, a fragile banking sector, and a sclerotic economy with high levels of unemployment, compounded by recent mass immigration. In our view, today’s inconclusive election result most likely serves to delay the implementation of any radical measures that could serve to ameliorate these problems over the medium term.
Please note: these are the manager’s views at the time of publication on 5 March 2018. They may not necessarily reflect the views of other managers at Janus Henderson. The political situation may change, and the opinion expressed is purely a view on the current available information. The view expressed within this article does not qualify as an investment recommendation.
Bond spread = the difference in the yield of corporate bonds over equivalent government bonds.
Risk premium = the additional return over cash that an investor expects as compensation from holding an asset that is not risk free. The riskier an asset is deemed to be, the higher its risk premium.