Fund managers are watching as Italy’s protracted political crisis continues and concerns rise over the implications of the fallout from the EU’s fourth-largest economy for the rest of the bloc.
While elections took place in March, a majority is yet to be formed and there is no government.
Stock markets and the euro are weak in response to the political drama in the country, Royal London Asset Management said on Wednesday (30th).
Last week, Italian President Sergio Mattarella rejected Eurosceptic Paolo Savona’s nomination for finance minister by Italy’s two populist parties, the Five Star Movement and the far-right League. Blocking Savona’s appointment, the president cited concern from Italian and foreign investors over its position on the euro.
While Britain’s departure from the EU raises questions that are yet to be answered, Royal London likened Brexit to a “walk in the park” compared to the upheaval that would occur if Italy tried to leave the euro zone – a key focus of the debate. The League asserts that fiscal rules used in the euro zone are “enslaving” Italians.
As the leadership stalemate continues, the prospect of yet another election looms large, meaning that Italy’s membership of the euro and its relationship with the EU itself really are up for discussion, according to Barclays investment strategist Hao Ran Wee.
Investors do not like uncertainty, as the adage goes, and markets have not taken the developments in Rome lightly. “The Italian equity market, the darling of Europe in the past two years, has given up all of its outperformance against broader European indices over that period, with bank stocks in particular taking a hit,” said Andrea Iannelli, investment director at Fidelity International.
“Italy’s government bond yields have jumped and spreads over their ‘safer’ German equivalents have risen, with some contagion to Spanish and Portuguese bonds. All Italian fixed income assets are suffering but sovereign bonds (BTPs) more so than corporate bonds, possibly due to the higher liquidity in the former, both in cash and futures, which makes them a preferred vehicle to hedge broader country risk held in credit portfolios,” he added.
Earlier reports indicated that the Five Star Movement and League had rebooted their efforts to form a coalition government and were trying to find “a point of compromise on another name” for the economy ministry.
Italy has been a strong market for asset managers in recent years with firms such as Amundi and local player Eurizon seeing strong flows. In February Eurizon said capital market reforms in the EU had helped it capture a quarter of market flows last year.
Payden & Rygel is one manager attracted to Italy recently. The firm opened an office in Milan, while Aberdeen Standard Investments created a head of distribution role for Italy earlier this year.
Brussels-based Candriam said Italy had been a “particularly strong” market when it reported a 10.5% increase in assets under management over the past year in March, and Axa Investment Managers said it’s multi-asset business had been “particularly successful” with Italian institutional clients in 2017.
©2018 funds europe
