Ubs: the Italian elections do not disturb the markets

The presentation of electoral programs and candidates does not seem to have moved the polls which, together with the first simulations on single-member constituencies, indicate that none of the current coalitions would be able to reach a majority sufficient to form a government. This is a situation of great uncertainty, which could lead to the creation of a large centrist coalition or a caretaker government supported by a broad coalition or even new elections in the autumn.

However, the markets do not seem to worry too much. Since the beginning of the year, the Italian Stock Exchange has risen by 5%, while that of the Eurozone has lost about one percentage point. The 0,3-year BTP remained almost stable, while the yield on the Bund increased and, consequently, the spread decreased by around XNUMX%. How can this calm be explained?

Experience accumulated following recent political events (Brexit, Trump's election, inconclusive elections in Spain, the Netherlands and Germany) advises investors to avoid rash reactions. But the apparent optimism on the Italian market deserves a more in-depth analysis.

Over the past year, GDP has consistently surprised economists on the positive side, leading to greater confidence in the sustainability of public debt. The market focuses on the debt-to-GDP ratio: if the latter grows, it contributes to a gradual decline in debt. In parallel, government intervention on banks in crisis made it possible to interrupt a short circuit that could have had systemic importance. An initial analysis of the electoral programs does not suggest head-on clashes with the European Union (EU) – in particular, the threats by M5S and Lega of a referendum on the euro seem to have subsided – and for investors this is an excellent news. Although a referendum on the euro is not contemplated in our Constitution, the prospect alone represented an insurmountable obstacle for many foreign investors.

Certainly some electoral programs present areas of potential conflict in the relationship with the EU (among others, the abolition of the Fornero reform or the Jobs Act) but, since they are electoral programmes, it is likely that they will be smoothed out after the elections when priorities are set of the new government.

Technical factors may also have contributed to the narrowing of the spread. Since the beginning of the year, the European Central Bank (ECB) has halved its purchases of securities and is preparing to conclude them in September. If, on the one hand, there is a convergence of views on the fact that the yields of all government bonds are destined to rise, on the other, investors have conflicting views on the implications for the spread of so-called peripheral countries, including the 'Italy.

The purchases of the ECB are made on the basis of a rule ("capital key") which provides that they are distributed on the basis of the percentage of participation in the capital of the ECB itself, essentially in proportion to the size of the GDP (not of the debt). The application of this rule in the presence of heterogeneous levels of debt meant that the ECB cumulatively bought proportionately less BTPs (14,4% of issues) than Bunds (21,5%). The spread could, therefore, have narrowed due to technical factors and not due to greater confidence in Italy.

On the contrary, due to electoral uncertainty, Italian government bonds yield more than half a percentage point more than Spanish ones and as much as Portuguese ones, a figure that we believe suggests a space for post-election recovery - especially with regard to Portugal.

Thanks to the good results and the ambitious business plans of some companies, the Italian stock market has outperformed the rest of the eurozone in recent months, reducing the valuation discount. While waiting for clearing up on the political front, we remain neutral.