Populists Gain Ground in Italy

by: , Director and Portfolio Manager, New York Life Investment Management

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)
Center-Right 37.0% 37.5%
M5S 32.7% 32.2%
Center-Left 22.9% 23.0%

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.

Bottom Line

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.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report, are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in this material will be realized.

About Risk

All investments are subject to market risk, including possible loss of principal. Stocks and bonds can decline due to adverse issuer, market, regulatory, or economic developments. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner, or that negative perception of the issuer’s ability to make such payments may cause the price of that bond to decline. A bond’s prices are inversely affected by interest rates. The price will go up when interest rates fall and go down as interest rates rise.

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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.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302.


Amit Soni, CFA

Director and Portfolio Manager, New York Life Investment Management

Amit Soni is a Director and Portfolio Manager in the Multi Asset Solutions (MAS) team at New York Life Investment Management. He focuses on quantitative and macro-economic investment research and portfolio management for the asset allocation

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