December 05, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

As most opinions polls had predicted, Italian electors voted against Matteo Renzi’s proposal to modify the role of the Senate. Following his resignation, the referendum result has opened a period of incertitude, which is nonetheless relatively customary in Italian politics. Early elections will probably be held by 2018 and there is no certitude that the populist Five Star party will be able to command a majority in order to govern. Furthermore, if an exit from the eurozone is proposed, it will also have to be decided by referendum. The Greek example shows that voters are not necessarily convinced of the benefits of leaving the eurozone.

The result has so far had only a limited impact on Italian interest rates. The spread over German sovereign yields stabilised at around 170 basis points. It is worth highlighting however that Italian 10-year government bonds are yielding almost 2.0% compared to 2.4% for US sovereign bonds of the same maturity. This represents a paradoxical situation for those who believe that Italian economy is on the brink of collapse. Although the recapitalisation of the Italian banking system has certainly been complicated by chronic political instability, the bailout mechanisms put in place by the eurozone and the Banking Union have at least provided a draft solution, which was inexistent prior to the 2011 crisis.

The “no” vote in the Italian referendum does not signify an exit from the eurozone. The markets have tended to overreact negatively to political ballots, which should be capitalised upon. After the three political “shocks”, namely Brexit, Donald Trump and the Italian referendum, the economy will, as usual, take the upper hand and impose its constraints. For the time being, the European economy continues to expand against a backdrop of more stable demand, persistently low borrowing costs and a weak euro. Although it is still too early to make any calls on 2017, events leading to high volatility should nonetheless be used to tactically strengthen positions among the most neglected asset classes, such as European value stocks.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in December 5th, 2016.

This promotional document is a simplified presentation and does not constitute a subscription offer or an investment recommendation. No part of this document may be reproduced, published or distributed without prior approval from the investment management company.

DNCA Investments is a trademark held by DNCA Finance

As most opinions polls had predicted, Italian electors voted against Matteo Renzi’s proposal to modify the role of the Senate. Following his resignation, the referendum result has opened a period of incertitude, which is nonetheless relatively customary in Italian politics. Early elections will probably be held by 2018 and there is no...
2016-12-05