Henderson: Italy’s “No” vote: local impact, but tail risks remain

The market reaction to the Italian referendum has been relatively muted thus far. We think that this is a reflection of pre-referendum positioning. While markets were arguably not pricing in such a comprehensive “No” vote (and Matteo Renzi’s resignation), they certainly viewed a rejection of the referendum proposals as a material possibility. Elevated risk premia were evident in Italian bond spreads and a weaker euro, while the value of Italian bank equities has almost halved since the start of the year*.
Focus on credibility

In the short term, markets are likely to focus on the composition and economic credibility of any new government. We expect that the current ruling coalition will continue to govern, given their majority in both houses of the legislature. However, their mandate is likely to be technocratic, with the delivery of the bank recapitalisations likely to be the top priority ahead of the 2018 general elections. Such an outcome would be relatively positive for asset markets as it would represent continuity and limits the major source of systemic risk within Italy (the banks).

That said, the probability of an early election has certainly increased. Such an outcome would represent a more troubling scenario as it raises the possibility of a far-right government and endangers both the bank recapitalisations and Italy’s relationship with the wider eurozone. While this is not our expected scenario, it remains a meaningful tail-risk (ie, of small probability, but significant potential impact). We are sceptical that Italy would eventually leave the European Union under a far-right government, however any delay/failure of the bank recapitalisation process would be a major concern.

Implications for Italian financials

In regard to banks, our view is that Italy’s few globally significant institutions are the main systemic threat. While the proposed Monte dei Paschi deal now looks in doubt, the global fallout from such a failure is likely to be limited. In reality, some large retail bond holders may be hit, but the size of the problem is of a more local scale. Of greater significance would be any problems with Unicredit. Although credit default spreads** on the institution have widened, the probability of a financial accident here remains low. The government and major institutions are well aware of the significance of Unicredit and the bank has already begun to dispose of assets to raise additional capital.

Ultimately, we believe that the referendum is a local storm rather than an event of global significance. However, we watch carefully for any signs of a general election or a further deterioration in systemically important financial institutions.
 
*Risk premium: the difference between the expected return on an asset versus that on a ‘risk-free asset’, such as a government bond. A bond spread is the difference in the yield of a corporate bond over an equivalent government bond.

** Credit default swap: a form of derivative between two parties, designed to transfer the credit risk of a bond. The buyer of the swap makes regular payments to the seller. In return, the seller agrees to pay off the underlying debt if there is a default on the bond.

Die Wertentwicklung in der Vergangenheit ist kein zuverlässiger Indikator für die künftige Wertentwicklung. Alle Performance-Angaben beinhalten Erträge und Kapitalgewinne bzw. -verluste, aber keine wiederkehrenden Gebühren oder sonstigen Ausgaben des Fond.

Die Informationen in diesem Artikel stellen keine Anlageberatung dar.