In the wake of Italy’s referendum that saw encumbent prime minister Matteo Renzi resign after losing the argument for constitutional change, a number of equity and fixed income managers have issued a mix of messages both warning of the outcome for markets, but also that the near term reaction may not portend the longer term outcome.
For example, Kempen Capital Management, said in a note that: “We are assuming for now that the Italian ‘No’ does not lead to a system crisis.”
“The referendum result could however make it more difficult to achieve a solution for the Italian banking problem. For the problem banks, such as Monte dei Paschi di Sienna and Unicredit, it will become more difficult to raise the required amounts of capital in the market. However, the banking problem needs some qualification. It’s only a matter of a fraction of the Italian economy and of the overall Italian government debt.”
Espen Furnes, manager of the long only Delphi Europe fund, said: “The election defeat for Renzi means there will probably be no shortcuts to necessary reforms. At the same time, fears are increasing that the troubled banks will go bankrupt and that they may also drag other European banks down with them.”
“Here at Delphi Funds, we don’t believe in such a result. Since a significant part of the loans to the vulnerable banks in Italy come from within the country, we only see a limited risk of contagion.”
“The election result was expected and means that Italian politics will continue to be in a chaotic state for the foreseeable future. In the short term, we think the situation will be resolved by the state intervening and either taking over some of the most troubled banks or ensuring financing and liquidity.”
Valentijn van Nieuwenhuijzen, head of Strategy at NN Investment Partners, took a similar line.
“The focus of a new government will be to pass the 2017 budget and to change the Italicum in a way that softens the plurality premium. Moreover, the new government will need to find a resolution for the NPL problem in the banking system, probably within weeks. Without the latter, a more lasting damage to markets could materialize.”
Fixed income focus
With the discussion on Italian debt and non-performing loans ongoing, Antoine Lesné, EMEA head of ETF strategy at SPDR ETFs, said that: “We expect this to trigger a sharp widening in Italian spreads to the tune of potentially 10bps followed by the hope of a tightening around 150-160bp vs German 10-year bonds in the medium-term.”
“This vote paves the way for further rejection vote in Europe though, and reminds us of the political headwinds that 2017 will bring. Volatility management remains necessary for long term portfolio construction in face of such events.”
David Simner, fixed income portfolio manager at Fidelity International, added that the referendum now put further pressure on the ECB, and its next meeting to discuss quantitative easing measures to assuage investors that Europe’s financial system is being supported.
“For Italian fixed income, the key date remains the ECB meeting this Thursday, December 8th, where we expect an extension of the QE programme by at least another six months after March 2017. The ongoing ECB support to European government bonds makes any meaningful widening in BTP spreads unlikely in our view, and a higher market uncertainty will support a dovish stance by the Governing Council. We would therefore see any selloff in peripheral government bonds as a buying opportunity.”
JP Morgan Asset Management Global Market Strategist Maria Paola Toschi added that turbulence in the bond market “could have serious implications for the financial system.”
“Most importantly, the Italian government would have to finance its huge debt burden at increased borrowing costs as a result of the effects of uncertainty on bond markets.”
2In addition, Italian bank balance sheets may suffer, given the overexposure of the country’s lenders to domestic sovereign bonds. The government collapse and the prolonged period of political uncertainty will also slow down or halt the rescue and recapitalisation processes that are underway, as well as the bad bank programme, while foreign investors may be less willing to underwrite capital raisings of Italian lenders.”