Ian Ormiston, manager of the Old Mutual Europe (ex UK) Smaller Companies Fund, reacts to the inconclusive Italian election result.
Another year, another set of ‘shock’ election results which really follow a well-established pattern. The Italian electorate has followed all the words with decisive actions. The key numbers are the continued rise in share of the Five Star Movement, in the past often dismissed as a pure protest movement, not a political party; the rise of the right wing Lega Nord (Northern League) above the more centrist Forza Italia; and the fall in vote share of the centre-left Democratic Party below 20%. So just as in France and Germany, parties at the fringe have gained at the expense of those at the centre with the centre left being the greatest loser.
In the short term we should have low political expectations, the new legislature will not sit until 23 March, and the process of government creation starts at that point, so we will have plenty of speculation but little certainty about the shape of the new administration for at least a month. There are a number of coalitions that might work, with the position of the Democratic Party being key as, like the SPD in Germany, it has ruled out coalitions with some parties, most notably Five Star, but post-election it might be forced to shift position. In what seems to be a longer-term trend, centrist parties are not offering the answers that electorates across the world want to hear; this is prompting a rise in extreme parties or a shift of power within mainstream parties, many of which are a coalition of interests. However, it is important to stress that coalitions are the norm in Italy, as they are across much of Europe (see Germany and its long wait to form a new government).
In terms of markets, the one-day move in the spread between 10-year Italian bonds and the benchmark German equivalent is large but nothing exceptional and the spread is still down year to date. Equity markets and companies in Italy are used to turmoil so it is unlikely that much changes as a result of the election and the upcoming uncertainty. Longer term, across Europe the mood continues to deteriorate amongst voters even as the economy creates jobs and incomes continue to rise. This could pose a threat at a national and a regional level, but not immediately. What we are likely to see first is more government spending and a rolling back of some of the reforms implemented since the financial crisis which will stimulate economies short term but pose challenges when the next recession arrives.