The Italian Prime Minister, Matteo Renzi, has announced that he will resign after suffering a heavy defeat in the referendum over reform of the constitution. Renzi gambled his political future by attempting to reform the country’s notoriously slow and costly government. Currently, Italy has a bicameral system, and its two chambers have virtually the same powers as each other which often lead to political gridlock. Effectively, Renzi wanted to strengthen the power of the Prime Minister and weaken the Senate but for many this reawakened concerns about concentration of power that still haunt Italy long into in its post-war era. By threatening to resign if the vote went against him, he also managed to turn the referendum into a protest vote against his style of reforming leadership.
With the ballots counted, the No vote won with 59% of the votes against 41% voting in favour of reform. The result immediately sent the Euro to a 20-month low, but it soon recovered to the previous day’s closing price, while the Euro Stoxx 50 (European Equity Index) quickly gained 1.5% as of 8.45am.
EUR / USD Exchange Rate
Source: Bloomberg, 5 December 2016
Italy’s President Sergio Mattarella is now seeking a new head of government. There was some speculation that a No vote would prompt a General Election and allow the Eurosceptic Five Star Movement (MS5) to gain power. However, it is more likely that an interim leader will be appointed until full elections occur in 2018. A survey by EMG released on Sunday showed MS5 winning a second-round ballot by 53% to 47% against Renzi’s Democratic Party and by 57% to 43% against the centre-right bloc. If MS5 does get into office it will do so on the back of a pledge to call another referendum – this time on leaving the Euro. This may cause upset to markets and will be exploited by many professional investors who are looking to invest in good companies in Europe with decent long-term prospects.
How are The True Potential Portfolios Impacted?
The threat of a potential banking crisis and political turmoil will be challenging for Italy. Exposure to European equities within the True Potential Portfolios is approximately 8% on average, whereas Europe (ex UK) makes up 14.5% of global equity markets. Using this as a reference point the True Potential Portfolios are underrepresented. However, this is not a deliberate act to reduce exposure ahead of the referendum and some of our manager’s favour Europe from a stock picking perspective, believing that there are some excellent companies with good long-term prospects that will successfully navigate the challenges Italy and Europe face.