BlueBay: Impact of Italian election result on markets

BlueBay: Impact of Italian election result on markets

September 20, 2022

Italy Politics
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Neil Mehta, Portfolio Manager at BlueBay Asset Management, comments on the impact that the Italian election result may have on markets in advance of the elections taking place on September 25th.

A fractured centre-left means the result of the Italian general election is likely to be a victory for the centre-right parties, with Brothers of Italy’s Georgia Meloni installed as new prime minister. We think that in the near term, markets will react tentatively but will give the new coalition a chance to prove their competence.

Meloni is unlikely to be confrontational from the go and will avoid unnecessary risk with institutions such as the EU commission and NATO. The brothers want to be seen as credible and capable in power, in a similar mould to other traditional centre-right parties across Europe. It is almost certain the coalition will appoint a market friendly finance minister, adding further confidence to investors and projecting fiscal prudence. But in medium-term, we see risks brewing under the surface.

Lega’s Matteo Salvini poll numbers have plummeted over the past year, and should he survive the election and its aftermath, could cause problems within coalition as he tries to win back votes. This could lead to in-fighting within the coalition, and with little or no time to put together and pass a budget by the end of the year, investors could quickly turn on the coalition. Then there is the reform of NGEU money and interaction with the EU, who want Italy to further crackdown on tax evasion and reform justice laws.

The more sanguine scenario would be if Meloni with her right wing agenda can push more into the centre and deliver good economic policy with structural reforms and less fiscally expansive as promised, which could be positive for the country, markets and her and her party. If she would deliver she could easily broaden her base especially marginalising Salvini and Berlusconi which would suit her personal preferences.

But with many challenges ahead, on the energy front, on rising interest rates, and on tax reform, should another crisis manifest we wouldn’t rule out another government of national unity. Investors should continue to tread with caution.

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