Janus Henderson: Italian election market risks have dissipated

We feel that market risks around the Italian election have dissipated significantly, following the Five Star Movement leader Luigi di Maio’s statement that it was ‘no longer the time for Italy to leave the euro’.

The Five Star Movement led in the last polls taken, and while they have only a small chance of achieving a majority, there remained the risk that an anti-euro party would play a key role in Italian government policy, thereby once again calling into question the long-term viability of the currency union.

This leaves the two main risks as there being no viable government following an inconclusive vote (and the inability of any of the leading parties to form a coalition) or the prominence of the more controversial, far right Northern League in a coalition government.

We do not think the former will impact markets, given that this is not only a fairly standard outcome in Italian elections, but also that many other European countries have functioned perfectly well in recent times without a government for extended periods (eg, Germany, Belgium, the Netherlands). The latter risk is more of a wildcard, but despite some increased electioneering in the south of the country, the Northern League’s voting base is fairly localised and we feel that they would only have limited influence in any right-leaning coalition.

As far as we are concerned, the real risks in Italy centre on its chronic debt-to-GDP ratio, sluggish economy, and still fragile banking sector. A lack of strong government policy deriving from an inconclusive election outcome makes it even less likely that these issues will be firmly addressed. That said, we do not think the election result in and of itself will precipitate anything other than a small bout of local market volatility.