- Election outcome and political scenario: The centre-right coalition won Italy’s general election on 25 September, with approximately 44% of votes. Overall, we believe that Italy’s general election offered no major surprises and at the margin, the news flow is positive, as the centre-right collation will not have a two-thirds parliamentary majority, which would have allowed it to vote for constitutional amendments. At the same time, it has enough seats to form a stable government. Italy could have a new government in early November at the earliest, with the new prime minister likely to be Brothers of Italy’s leader Giorgia Meloni. However, the Brothers of Italy will need its allies to ensure a solid parliamentary majority and this could a be viewed positively by markets. In the meantime, Mario Draghi’s government will address some of the work on the budget law. When the new government is sworn in, it may choose to make adjustments to public finance figures and try to negotiate a revision to the national recovery and resilience plan (NRRP). It is also likely to stick to EU fiscal targets and avoid clashes with EU institutions on economic policy. Campaign promises are likely to be amended, but some fiscal loosening may be attempted.
- Italy debt market: The better-than-expected performance of Italy’s economy in H1 2022 contributed to a favourable environment for fiscal trends, supporting technical factors. On the demand side, ECB data on sovereign debt as of end-July showed the central bank’s commitment to fighting fragmentation. As such, the ECB role has proved relevant thus far in 2022. Foreign positioning is low by historical standards. At the same time, marginal foreign flows look to be less of a spread-driver than they were in previous phases of rising volatility and uncertainty, thanks to the ECB’s role and rolling investors’ high investment. These factors, together with the Transmission Protection Instrument (TPI), should help counterbalance the hawkish ECB stance. The BTP-Bund spread proved fairly stable in the run-up to the election. We believe that idiosyncratic risks will stay contained and the spread will be driven by investor confidence in the Eurozone’s economic prospects. Investors may consider raising their exposure to BTPs if the spread returns to the 250bp area.
- Italy equity market: Following the general election, Italy’s equity market should see some short-term relief, rebounding somewhat in the financial sector. From a valuation standpoint, Italy’s market is relatively cheap. In order to see a structural rally, we need more clarity on government appointments, on the final approval of the 2023 budget law, and on possible changes to the NGEU plan that the incoming government may negotiate with the EU. As such, uncertainty surrounding the outlook for Italian equity remains high. We focus on companies that have visibility on future growth, with some protection from strong inflation, and keep a balanced exposure to sectors. If the centre-right coalition sticks to its campaign pledges, we could see some fiscal support to Italian corporates, possibly resulting in some positive impacts for Italy’s small- and mid-cap segment.
