Waning Political Risk Positive For Equities

A formal split of Silvio Berlusconi's centre-right party has given Italy a degree of political stability not seen since the previous technocratic administration of Prime Minister Mario Monti. The loss of 30 centre-right senators, who on November 18 officially formed the New Centre Right (NCD), gives Bersluconi insufficient votes in parliament to once again threaten the survival of the government. While we remain doubtful that the pace of reform will be sufficient to quickly boost Italy's growth potential or reduce hefty public debt loads, we do see this as a positive development for Italian equities, given that political risk has been a significant driver of relative equity performance in 2013.

A reduction in near-term political risk can help spur a more sustainable and less volatile rebound in Italian equities, which also bodes well for our eurozone over US equities asset class strategy view. However, we see several important risks, including unrealistic deficit targets outlined in the preliminary 2014 budget law that open the potential for further political infighting over unpopular spending cuts. Given its long history of political instability and short-lived governments, we are not currently considering entering a bullish Italian equity view.

Politics Drives Italian Equities
MSCI Europe & Milano Italia Borsa Equity Indices, Normalised To Jan 1 2013 = 100

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This article is tagged to:
Sector: Country Risk
Geography: Italy

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