Italian Referendum: Risk and Opportunity

A negative outcome might offer interesting opportunities in European equities

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Nov 25, 2016
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An important referendum will take place in Italy on Dec. 4. Italian citizens will vote on a proposal for constitutional reform.

Despite the outcome of the referendum, not much will change in the economy. However, stock markets will probably react to a NO outcome. If NO wins, it will be interpreted as an additional anti-establishment and anti-euro choice, a risk that Italy will leave the European Union within a few years and the EU will collapse farther along the line.

Asset classes

If NO wins, markets will react negatively. A few international asset classes will be affected:

  • Bonds: Negative for Italian bonds. Italian bonds will be sold as an obvious consequence of the referendum. Other EU countries such as Portugal, Greece and Spain might also be under fire. It might be positive for “safer” bonds such as the German.
  • Equities: Negative. Especially European stocks. Financials will be in trouble. Banks in Italy will see large declines. Weak banks such MontePaschi or Deutsche will experience double-digit losses. Other markets such as Spain, Greece and Portugal will be affected. U.S. markets probably will not see large declines but might not be immune.
  • Currencies: Negative for the euro, positive for the Japanese yen, Swiss franc and U.S. dollar. The currency of the EU will be under pressure while “safe” currencies such as the yen, the franc and the dollar might go up.
  • Gold: Positive. The perceived safety of gold, as well as its protection against inflation, will attract investors. Market turmoil will also make future rate hikes less likely.

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