Italian Referendum and Global Markets: What's next in 2017
‘Once more unto the breach’. We imagine financial markets feel similar to the troops in Shakespeare’s King Henry the Fifth, after the no vote in the Italian referendum on constitutional reform.
Political events and the markets: The dangers of overreacting
In a year full of political upsets, markets have to once more overcome uncertainty. With a 59.1% to 40.9% margin against the proposed constitutional and political reforms, according to Bloomberg as of 8.00am GMT today, Italy’s Prime Minister Renzi suffered a defeat that cost him his job. However, beyond short-term volatility, we don’t see this potential setback for the Renzi government as a game changer for our market outlook and 2017 Global Market Outlook – Annual Report.
The outcome of the referendum is clearly a concern for the European Union (EU), both politically as well as in terms of its impact on financial markets. On the political front, we have to see whether Renzi does actually resign. And if he does, will Italy’s President Sergio Mattarella call for new elections or opt for a caretaker government? I continue to believe it is unlikely that new elections will be held.
The president is keenly aware it will probably not resolve anything and would create a lot of unwanted uncertainty. I believe a continuation of the current government under Renzi or his Minister of Finance, Pier Carlo Padoan, is the most likely outcome.
Under those circumstances, we expect markets to overcome their negative reaction relatively quickly. After all, nothing much has changed and, in the absence of a political crisis, we believe it will quickly be business as usual.
The concern that this no vote will push Italian government bonds and bank shares into a self-reinforcing downward spiral is not likely to materialize. The European Central Bank’s backstop through its quantitative easing program is too powerful. And a bank recapitalization effort will likely gain momentum should stress levels rise.
That being said, the outcome of the referendum is a potential setback for the EU, as it strengthens the country’s populist-oriented political parties, which question Italy’s inclusion in the European Monetary Union and/or use of the euro as its currency.
Still, we believe it is important to not overreact to political events. Two political examples of investors having an abrupt over-reaction to political headlines where the markets soon course-corrected are quite recent. For example, we saw that while markets reacted swiftly and negatively to the Brexit vote, they soon recovered. And later, while many expected equity markets to react negatively to the 2016 U.S. presidential election’s outcome, equity markets actually experienced a Trump bump as the S&P® 500 Index ended up 3.4% for the month of November.
So, where does that leave us, as we look toward 2017?
As we noted in our 2017 Global Market Outlook, we anticipate a challenging investment environment in the new year.
Near-term, we expect global economic growth is likely to improve, spurred by fiscal stimulus as political leaders worldwide move away from austerity. Longer-term, however, our global team of investment strategists think the prospect of trade protectionism raised by Brexit and the U.S. presidential election could mean slower growth and higher inflation.
We’ll watch closely for evidence that markets have moved too far into fear or euphoria and look for downside protection when it is cheap.
In our 2017 Global Market Outlook report, titled, “The New Abnormal,” we explain why we believe the search for yield is not going to get any easier in 2017 against a backdrop of record U.S. equity prices, narrow credit spreads and low bond yields.
As our Global Chief Investment Officer Jeff Hussey says: "Investors will need to venture further afield in search of returns, using the full range of tools available in a globally diversified, multi-asset portfolio.”
To learn more about our investment strategists’ perspective for 2017, click here.
Disclosures:
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
Investing involves risk and principal loss is possible.
Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.
Investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation.
Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Russell Investments is the owner of the trademarks, service marks and copyrights related to its indexes.
Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is a subsidiary of London Stock Exchange Group.
Copyright © Russell Investments 2016. All rights reserved.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
UNI – 10966
