The Italian Referendum: The effect on the European Markets and our Clients Portfolios.

By Kieran Drew
In December 12, 2016
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Last week the Italian Prime Minister, Matteo Renzi, announced that he will resign after suffering a heavy defeat in the referendum over reform of the constitution. Renzi had put his political career at stake by attempting to reform the country’s notoriously slow and costly government. Currently, Italy has a bicameral system, and its two chambers have virtually the same powers as each other which often lead to political gridlock. Effectively, Renzi wanted to strengthen the power of the Prime Minister and weaken the Senate but for many, this rekindled concerns about concentration of power that still haunt Italy long into in its post-war era. By threatening to resign if the vote went against him, he also managed to turn the referendum into a protest vote against his style of reforming leadership.
With the ballots counted, the No vote won with 59% of the votes against 41% voting in favour of reform. The result immediately sent the Euro to a 20-month low, but it soon recovered to the previous day’s closing price, while the Euro Stoxx 50 (European Equity Index) quickly gained 1.5% as of 8.45am.

 

What’s next?

 
Italy’s President Sergio Mattarella is now seeking a new head of government. There was some speculation that a No vote would prompt a General Election and allow the Eurosceptic Five Star Movement (MS5) to gain power. However, it is more likely that an interim leader will be appointed until full elections occur in 2018. If MS5 does get into office it will do so on the back of a pledge to call another referendum – this time on leaving the Euro. This may cause upset to markets and will be exploited by many professional investors who are looking to invest in good companies in Europe with decent long-term prospects.

 

How are our Clients Portfolios impacted?

This could potentially be a challenging time for Italy, with the threat of a banking crisis combined with political turmoil. Exposure to European equities within the investment portfolios are generally low at the moment, but this is not a deliberate act to reduce exposure ahead of the referendum, as there are some excellent companies with good long-term prospects that will successfully navigate the challenges Italy and Europe face.

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