For once this year, a major political vote has gone to script and followed the polls. Polling companies all around the world will have breathed a sigh of relief, but it may be too soon for investors to do the same.
While it would be very much lacking in Christmas spirit to give the pollsters no credit for getting this one right, the point should be made that this vote was not actually a close one, in sharp contrast to the Brexit referendum and the US election. The final result of 59.1% saying no to Renzi and 40.9% yes is approaching landslide territory for a referendum.
The danger for investors is that because it was very hard for the pollster to get this one wrong and it went as forecast, the result was fully priced in before it became official. The real impact on markets will come when it becomes clearer what will follow Renzi’s departure.
More specifically, markets will be anxiously awaiting indications of what this vote means for Italy’s heavily stretched banks, and the nation’s membership of the European single currency. Italian banks were one part of the market which has not come through today unscathed but the share price falls seen by the likes of Unicredit and Mediobanco Group were in the 3 – 4% region, far from a crisis.
This could however just be the calm before the storm if the politics develops in an unfavourable way over the coming weeks. The key seems to be whether the government can stay in place under a different leader or whether early elections will be triggered, possibly ushering in the anti EU ‘Five Star Movement.’
Schroders senior European economist and strategist Azad Zangana see Renzi’s loss as a big set-back to the Italian economy.
“Renzi was Italy’s best hope of enacting badly-needed economic and structural reforms, and so his departure is a major blow for Italy’s medium to long-term outlook,” he said. “The question posed in the referendum was related to voting reforms, which would have given the ruling party more power to enact legislative change. Italy’s equal system of power between the Chamber of Deputies and the Senate has created gridlock, and is a key obstacle to greater economic reforms.”
