5th December 2016
This is negative for Italian assets, European shares, the Euro and risk assets like shares generally and positive for safe havens like government bonds in “safe” countries and gold and some of this reaction has already been seen today. As was the case with Brexit and the US election the initial knee-jerk reaction is being seen in Australia and Asia with the Australian share market initially falling 1%.
A likely “No” vote (which was foreshadowed in opinion polls) adds to uncertainty about the Italian government and its banks and risks further fuelling fears about a “break-up” of the Eurozone.
However, a lot will have to occur before Italy leaves the Eurozone, if at all. The Senate referendum’s failure will just mean messy politics as normal in Italy (either under Renzi or an alternative depending on what Italy’s President requests). However, it’s unlikely there will be an election before the due date in 2018, and even if there is it’s not clear that the populist Five Star Movement (5SM) will win, unless it changes its anti-Euro stance. And even if 5SM were to win and call a referendum on Italy’s membership of the Euro (which would first require a constitutional change), a majority of Italians support staying in the Euro.
The complication with the referendum is that a “No” vote does not necessarily indicate a boost for nationalist anti-Euro populism because many voters would have voted “No” simply to maintain checks and balances in the political system (much like Australia and the US have with their Senates). Ironically a “Yes” vote would have actually increased the risk that a populist party like 5SM could form government at some point (as it would just need to get more votes than any other party in the lower house and after a “Yes” vote would not have to get the support of the Senate). So the (likely) defeat of the “Yes” vote is not necessarily a sign of increased support for anti-Euro populism in Italy.
Finally, while Italy looks likely to have voted “No”, pro-Euro Alexander Van der Bellen defeated the Euro-sceptic right wing nationalist Norbert Hofer in the Austrian presidential election by what looks to have been a wider margin than in the initial election earlier this year prior to the Brexit vote. So no increase in support for populist nationalism in Austria.
More broadly, my view remains that the Eurozone is likely to continue to hang together and bouts of market turmoil driven by break-up fears should ultimately be seen as buying opportunities. Just as we have seen since the Eurozone crisis began earlier this decade.
For more insight, read my related note on ‘Brexit, Trump…Itexit, Le Pen, Eurozone break-up…or is Europe different? Implications for investors’.