Kames Capital’s senior fixed income investment specialist Adrian Hull believes forthcoming elections in France and the Netherlands could become a threat to investors in Italian debt, in particular in the event voters in one of the two countries elect far-right candidates.
“2016 wasn’t a good year for Italy’s economic fundamentals or credit ratings. For analysts and the rating agencies the structural reform programme clearly has no momentum after December’s failed referendum result.
“Real economic growth has eluded Italy since 2000 and forecasts out to 2018 are below 1%. Thus, despite solid trade and current account surpluses, a continuation of growth below the increase in nominal debt weighs on Italy’s outlook,” explained Hull.
If Kames Capital’s senior fixed income investment specialist found encouraging the process of Italian banks’ recapitalisation, he assessed the plan will leave an extra €20bn debt to the Italian government, he called an unhelpful addition as the Italian government debt approaches €1.5trn and its budget deficit represents around 2.5% of GDP.
Hull assessed it is counterintuitive that Italy’s 10-year bonds have traded so well since the referendum, with the spread over equivalent German bonds consistently around 1.6% until last week.
“Markets are wary of Brexit-style events and too many UK commentators have predicted the ultimate demise of the euro. But with the imminent round of elections in Europe any break with consensus politics in Holland or France will ultimately prove to be Italy’s problem too.
“As Italian bonds have drifted wider the risk of Geert Wilders or Marine Le Pen dominating market sentiment will lead markets to continue to reassess Italy – and investors in Italian debt have significantly more to lose than those in France or Holland,” Kames’ Hull said.