The election on 4 March saw the anti-establishment Five Star Movement (M5S) and the far-right Northern League emerge with the largest majority, gaining 32% and 17% of votes respectively.
This led fund managers to express concerns that a strong showing by right-wing and populist parties poses a threat to eurozone stability.
However, formal talks on creating a new government do not start until 23 March when speakers for the upper and lower houses of parliament are selected, meaning the government in Italy is still not clear.
Speaking to Portfolio Adviser, Zahn, lead manager on the Franklin UK Corporate Bond and UK Gilt funds, said: “Fifty percent voted for parties that are anti-Europe. The Italian election has flagged populism is still alive. It is not dead, it is just on a slight holiday.
“The question is, how will that impact Brexit negotiations?”
According to Zahn, Brexit could be affected in one of two ways.
First is if a populist government comes to power and wants to reform Europe; and the second is if Angela Merkel, having recently secured another four years as German chancellor, stamps her authority and the need for cooperation across the bloc and alleviates any unrest.
If the latter scenario plays out, Zahn warned populism will certainly return in five years if European governments do not do anything to fix the unrest in parts of the continent.
“Then we will have a populist-led government,” he added.
High-cost currency hedging
However, Zahn believes UK investors should still look to European or gilts rather than US treasuries because of the cost of hedging the dollar.
“People have bought US because of high yields but people are underestimating how much you have to pay to hedge back to sterling or the euro,” he said.
“You pay 1.5% to hedge so why not stay here [in the UK] because you are not getting much upside?
“If the Fed hikes this year, that makes the cost of hedging even more, so if you are hedging on a short-dated timeframe as a European investor you should be heading to the UK or Europe.”