The Italian Referendum: Equity Market Response

by: Columbia Threadneedle Investments

By Philip Dicken, Head of European Equities, Threadneedle International Ltd.

Prime Minister Matteo Renzi lost the referendum on December 4, with his proposal rejected by 59.1% of the population. Here's what the defeat means for Italy, the EU and equity markets.

The following perspective is from our London team, who shares research and insights on European markets with colleagues across the globe.

The actual No vote - against the actual referendum point - was not a big surprise. It was quite well-flagged by polls ahead of the vote, but the scale was definitely a surprise. The turnout was quite high and it was a very strong No vote, but it wasn't as close as the June Brexit vote in the U.K.

What does the result say about the future of Italy?

The vote itself was on a complicated referendum question that included a number of points for constitutional reform - the senate-cutting costs, the way the upper house would be organized and the power it would be able to wield. If you disliked any part of that, then you might have voted No anyway. I think the problem for Renzi was that he made it very much a vote about him. He said that if he lost then he would resign, and so it became a very personal vote on people's opinion of Renzi himself.

How likely is it that this result allows for the far-right Five Star Movement to come to power, and how could that happen?

In the short term, this limits the ability of Five Star to form a government in an election because the referendum proposed a change to the constitution that would have limited the power of the senate. A Yes vote would have given more potential power to the biggest party in a general election. But a No vote is a vote for the status quo and retains some of the checks and balances. So the possibility of a very strong Five Star win and limited controls is reduced.

How did equity markets react to the news?

Equity markets were quite positive after the result, and I think this is because the No vote had been ahead in the polls, so it wasn't a surprise - maybe the scale was a surprise, but the No vote itself was already priced in. Where we would have concerns going forward is over banking reforms, which are coming up in the next few weeks.

How were you positioned going into the event, and are there portfolio implications as a result?

Our process is very much bottom up. So while we take account of the macroeconomic environment, we certainly do not make decisions based on events such as an electoral vote in itself. We were underweight Italy, very much underweight the Italian banks and, where we do have positions, they tend to be stock-based, and very much based on the merits of each company rather than due to our macro views.

Will we see further volatility in European equity markets as the Italian political systems play out?

We've gotten used to a centrist establishment order, and this is not necessarily a symptom of the rise of populism. But it is part of the string of electoral results that have been against the core establishment, and I think that will continue. So the problem for the EU and existing centrist parties is that they have to promote more growth, give more opportunities to people to engage and reduce the fear of immigration that some people feel is out of control. And they have to do this in an environment that is currently not giving them very much room, so it's a difficult conundrum they face.

In Austria, the public has rejected the far-right mandate. What's your analysis of the December 4 presidential election?

Up until the very last week, the vote in Austria was too close to call. But the vote was clearly in favor of Alexander Van der Bellen, the Green candidate, not Norbert Hofer, the far-right candidate. So anybody behind Europe and the European project will look at this as very positive because a far-right victory would have been a real embarrassment for them. Austrians have questions just like other European nations, and this election is just a small part of that long-term debate. Remember that the Austrian president has relatively limited powers, and only in extremis would they be used in a powerful way.

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