In the wake of the Italian referendum, Stuart Mitchell reflects on the ongoing impact of political risk in Italy – and Europe.
Italy’s decisive rejection of constitutional reform does not materially alter our more positive outlook. In the short term, President Mattarella should be able to form a stable technocratic government. Longer term, whilst elections may have to be brought forward to autumn 2017, this should still allow enough time to address the issue of non-performing loans within the banking system.
Although the ‘No’ vote will undoubtedly make the recapitalisation of the weaker banks - Banca Monte dei Paschi di Siena and UniCredit - more challenging, the government has already introduced various schemes that should significantly reduce the amount of non-performing loans within the industry. The shortening of the judicial process for the repossession of assets on defaulted loans and the establishment of the Atlante fund to buy junior debt are very significant developments.
On the political front, furthermore, it is not clear that the ‘No’ vote will lead to an imminent referendum on Italy’s place within Europe. Opposition to Matteo Renzi is fractured and current opinion polls continue to suggest that the Italian people overwhelmingly wish to remain in Europe and with the euro.
More importantly, the Continental European economy continues to recover nicely, with the eurozone manufacturing PMI rising in November to its highest level since January 2014. We have also been pleasantly surprised by the significant recovery in German exports over the past three months. France is also witnessing the beginnings of a very healthy economic recovery. For example, Legrand, a French industrial firm that specialises in digital and electrical infrastructure (such as for homes, offices and hotels), talks of “an inflection point being reached in new building”. Hays, the British temp agency, has reported an “all-time record net fee performance”.
Somewhat surprisingly perhaps, Brexit is rarely mentioned in our numerous company meetings as a threat to the recovery. Remember, the UK accounts for just 6% of eurozone exports; although, of course, we have to be alert to the risk that Brexit could threaten, by a sort of contagion, the whole European ‘project’. At the moment, however, there seems to be scant parliamentary backing for referenda in other member states.
As we have noted previously, the British economy appears to be hitherto largely unaffected by the Brexit vote. Indeed, the UK composite PMI nudged even higher in September. Our numerous company meetings, furthermore, attest to a relatively buoyant economy. As we have written before, however, we will only begin to have some idea of the real impact of the vote when the UK’s negotiations with global trading partners begin in earnest next year. The outline of a possible deal with Europe may well only truly emerge in 2018 or later when the hard bargaining really starts.
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Stuart Mitchell of S. W. Mitchell Capital is the manager of the St. James’s Place Continental European and Greater European funds. The opinions expressed are those of Stuart Mitchell and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective fund or investment. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.