Do not overlook the Italian referendum

There is a crucial vote coming up which should not be overlooked – and it is not in the US. James Yardley, senior research analyst at Chelsea Financial Services, explains.

Do not overlook the Italian referendum

There is an extremely important vote coming up and no, I don’t mean the US election. The deafening media delirium coming from the US is causing us all to overlook an equally, if not more important, political event. This one has the potential to have major consequences for financial markets and the global economy.

I’m talking about the Italian referendum, which will be held on 4 December, in which Italians will vote on constitutional changes proposed by the pro-EU prime minister Matteo Renzi.

Matteo Renzi

At the age of 39, Renzi is the youngest prime minister in Italy’s history and leader of the centre-left, Democratic party. Renzi has yet to face the electorate at a national election, having become prime minister after winning an internal power struggle in 2014.

Since coming to office his government has enacted numerous, and arguably much needed, reforms. He has overhauled the Italian senate, relaxed employment and labour laws, and simplified the legal system.

Renzi is widely liked by financial markets who believe his reforms will be good for the Italian economy over the longer term. However, he is struggling with a banking crisis that he inherited, a country weighed down by debt, and slow economic growth. And, like any reformer, Renzi has inevitably upset a lot of people along the way including the trade unions.

What is the vote on?

The new proposals will reduce the power of the Italian senate, currently a major source of political gridlock. The 315 senators would be replaced by 100 regional councillors and mayors who would no longer be able to call a vote of no confidence in the current government.

The reforms will tip the balance of power towards the chamber of deputies – Italy’s equivalent of the House of Commons*. Renzi believes these reforms will help rid Italy of its crippling instability. They will also enable him to continue with his program of structural reforms. Critics argue the proposals are undemocratic and will hand too much power to Renzi and future prime ministers.

Why does it matter?

Much like David Cameron did with the EU referendum in the UK, Renzi has staked his political career on the vote by promising to resign if he loses. By personalising the referendum, Renzi has united the opposition against him. As with Brexit, the vote is being seen by many Italians as a way to air their discontent with the EU and the political establishment. So while notionally the vote is about constitutional reform, in practice it has become about many other issues, such as the economy, the EU, the Italian banking crisis, and Renzi’s general performance and popularity.

What do the polls say?

When the referendum was first called the ‘yes’ side had a huge lead, but this has rapidly deteriorated. As late as February many polls were showing the ‘yes’ side with a more than 30 point lead. This might be one reason why the vote is still off most people’s radar. However since July, 13 out of the last 20 polls have shown the ‘no’ side with a lead*. Essentially the polls are now too close to call and the outcome is highly uncertain.

Why haven’t the markets paid more attention?

Stock markets can struggle to deal with too many ideas at one time. At the moment the focus is on who will win the US election and when the US central bank will raise interest rates. As such, the Italian referendum has flown completely under the radar but this is likely to change in the coming weeks, particularly if the polls continue to stay so close.

What might be the consequences of a ‘No’ vote?    

Renzi has promised to resign if he loses the vote. He has started to backtrack on this recently but it would be unlikely that he could survive the fallout. If there is a ‘no’ vote, there will be a huge amount of uncertainty which is likely to trigger volatility in financial markets. Renzi is widely seen as the best chance that Italy has had at reform in years and his fall could potentially lead to a crisis.

It is possible new elections would be called, which could pave the way for the populist anti-EU Five Star Movement to take power, as well as a potential referendum on Italy’s membership of the EU. That’s why some commentators are saying this vote is even more important for the future of EU than the Brexit vote. A ‘No’ vote could spell the beginning of the end for the EU.

What does it mean for your investments?

A ‘no’ vote would likely be bad for risk assets, particularly European equities. The euro would likely also fall against all major currencies. The cost of Italian government debt would likely spike, which might ripple through to other southern European countries such as Spain and Portugal.

Gold should do well on any fears the EU might break up. I like the Elite Rated Blackrock Gold & General fund, which invests primarily in gold mining equities. It has a very long track record going back more than 25 years and it invests in high quality gold miners with strong cash flows.

If there is a ‘yes’ vote, it could be a boost not just to Italian equities but also to the wider European market as it breathes a sigh of relief. Newly Elite Rated Mirabaud Equities Europe Ex UK Small and Mid fund has around 11% invested in Italian companies. Another of my favourites in this sector, Henderson European Focus, has 5.8% exposure to the Italian market, and Jupiter European 3.3%.


Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest. 


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