Tuesday, 26 February 2013

Guy Foster: Italian equities hit by fears that Berlusconi's back

The Italian election result, as you will have seen, has ended in an indecisive victory on paper for the centre left coalition of the Pierluigi Bersani. Italian electoral law guarantees the largest party a majority in the lower house, whereas in the upper house a modification on the same principal guarantees the largest party in each region a majority of the seats for that region. Bersani won the lower house, confounding some projections which suggested that Berlusconi would win both houses. Nevertheless the results, when finally confirmed, will give Bersani a 120 seats, two more than Berlusconi but, even in coalition with Monti which would bring the total to 141 seats, this will not be enough to form a majority. For an Italian government to be formed it needs to survive a confidence vote in both houses so this uncertainty in the senate is very disappointing.

The weather seems to have played a key role, dissuading older and less mobile voters who are typically more centrist and thereby giving more weight Beppe Grillo’s five star movement which is the darling of Italy’s disaffected youth. Whilst the Reuters headline that the five star movement is the most powerful force in Italian politics looks crazily sensational, what is clearly true is that around a quarter of Italian voters supported Grillo’s campaign pledge of a referendum on the euro, whilst just under 30% supported Berlusconi’s non-credible tax giveaway. Bersani’s coalition, which campaigned for some labour liberalising reforms, did OK, but Monti’s support collapsed to less than 10%. This represents a firm rejection of austerity and EU influence.

The next step is for Bersani to try and form a government. Grillo has always maintained his party would not join a coalition. This process is likely to take a few weeks and frankly almost any combination is possible. If a government can be formed then it will be unstable and legislation will be difficult to pass. If a government cannot be formed then new elections will be held, probably in May at the earliest, and it is very unclear whether this result will embolden more people to choose the fringe parties or whether more temperate weather will rejuvenate the traditional parties’ votes.

Peripheral bonds are all selling off sharply today while the quality bond markets are stronger.

The Italian equity market has sold off some 8% from its level at 14:30 yesterday when the first poll suggested that Berlusconi might win, which means by my calculations his popularity has knocked €15bn off the Italian equity market.

The euro, against the dollar, is down near 1.30 testing the low for the year. Those reactions look entirely rational in the context of the challenges this result places in front of Europe as the currency union tries to overcome a seemingly ever growing series of hurdles.

Guy Foster
Head of Portfolio Strategy

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