As expected, no single party has obtained more than 40% of the Italian vote which would have enabled the formation of a stand-alone government. Although Italy will have to face a further period of instability and uncertainty before a new coalition can emerge, this outcome was largely anticipated. However, Eurosceptic parties hold now a majority of seats and the score recorded by the anti-establishment M5S party was higher than expected, at around 32% of the vote compared to 26% in the opinion polls. This is a fresh warning for the eurozone and also represents a wake-up call, with populist and nationalist movements remaining a risk for European construction over the medium term.
Markets have been relatively unaffected in their initial response. Investors were not anxious before the elections and the lack of clarity regarding the post-election situation was largely anticipated. The absence of a knee-jerk reaction among markets today would therefore appear logical. Economies in the eurozone are currently growing above their potential and the recovery is now widespread across the member countries. This factor alleviates perceived political risk in Europe. Markets will now focus more closely on the sustainability of current growth levels and the ECB exit strategy. The outcome of the Italian elections could nevertheless cap any further tightening among Italian debt spreads over the next few months.
We reduced our equity exposure to neutral by selling eurozone equities last week. The results of the Italian elections will not therefore impact our positioning today. We had no active position on Italian debt within our diversified funds.
The results are probably negative for the image of the eurozone. On the other hand, President Macron’s pro-European stance in France and the approval of the grand coalition by SPD members in Germany could give a fresh boost to European integration.