Populists Gain Ground in Italy
What Happened Here?
No single party or coalition could garner an outright majority in the 2018 Italian general election on Sunday, March 4. However, the populist and Eurosceptic parties – the Five Star Movement (M5S) and the League – gained significant ground, with M5S being the single largest party with roughly 32.5% of the votes. The three-way fragmented mandate between the center-right, center-left, and M5S means we may be looking at a long period of coalition talks. Given the absence of a clear majority, the likelihood of a second election cannot be completely ruled out.
Percentage of Seats*
|Party/Coalition||Chamber of Deputies(Lower House)||Senate (Upper House)|
Source: Ministry of Interior, Italy. *Data as of Monday morning, 3/5/18, 10:00 a.m. EST.
The center right coalition, led by the League at 17.5%, turned out to be the largest group, winning a total of around 37% votes. After these results, both the leaders of the League and M5S, Matteo Salvini and Luigi Di Maio, claimed victory and a right to lead. The biggest tail risk had been the possibility of a Five Star-led anti-establishment government, which would imply a significant change in fiscal and foreign policy. M5S has previously ruled out joining a coalition, which means the odds of M5S forming the government are still low. With a mainstream coalition coming into power, we do not expect big changes in policy, and despite the expectations of an ambiguous mandate, the Italian Policy Uncertainty Index (Figure 1) was sitting below its long-term average at the end of February 2018.
Figure 1: Italy Economic Policy Uncertainty Index
Source: Bloomberg, as of 3/5/18. Last data point 2/28/18. Italy Economic Policy Uncertainty Index – This tracks the general state of the economy as it relates to businesses. It can include broad economy-wide conditions or specific economic conditions of an industry. Past performance is no guarantee of future results, which will vary. It is not possible to invest in an index.
Brexit and the U.S. Presidential Election serve as a reminder that political surprises and uncertainty may not necessarily negatively impact the economy or financial markets. After key political events, markets have, in most cases, recovered, despite some short-term volatility and panic. And recent evidence from Netherlands and Germany suggest negligible economic impact from lengthy political negotiations.
High level of public debt (Figure 2) warrants some caution for Italy, but we believe it should not pose an immediate threat if the economy does not slow down. Currently, the economy is expected to grow at a rate of 1.5% this year, and recent macro-economic data like a surge in the composite Purchasing Managers Index (PMI) and a strong upward trend in ZEW Current Conditions point to sustained growth.
Figure 2: Italy Government Debt as a Percentage of Gross Domestic Product (GDP)
Source: Bloomberg, as of 3/5/18. Last data point 12/31/17.
The risk of an Italian referendum to exit the European Union faded last year. Despite the significant increase in populists and Eurosceptics, we believe the tail risk of an exit remains close to almost zero. As such, we believe the Eurozone should continue its gradual recovery. We remain constructive on the region, with a neutral stance on currency, which can remain volatile among political risks, strong economic growth, and extended long speculative positions.
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Index performance is shown for illustrative purposes only and does not predict or depict the performance of the Funds. Indices are unmanaged, include the reinvestment of dividends, and cannot be purchased directly by investors. Past performance does not guarantee future results.
Italy Economic Policy Uncertainty Index – This tracks the general state of the economy as it relates to businesses. It can include broad economy-wide conditions or specific economic conditions of an industry.
The Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The purpose of the PMI is to provide information about current business conditions to company decision makers, analysts and purchasing managers.
ZEW Current Conditions – This survey summarizes the net percentage of positive and negative responses regarding the expectations for economic growth in the next 6 months, as given by financial analysts from banks, insurance companies and large industrial enterprises.
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