November 29, 2016— On December 4, Italian citizens will vote on constitutional reforms proposed by the government of Prime Minister Matteo Renzi. These reforms would dilute the power of the country’s Senate, making it easier for the Italian government to get laws, including structural economic reform laws, passed through the lower house Chamber of Deputies.

You may want to refer to our October 25 blog post, Italian referendum: tempest in a teapot?, which explains the issues involved with the referendum and provides our views. Since this post was published, every opinion poll (Figure 1) conducted by the seven major pollsters (five are shown below) have pointed to a “no” result by large margins, up to 10 percentage points. Given this opinion polling, we believe markets have already fully priced in the probability of a “no” outcome, including that of Prime Minister’s likely replacement by another figure in his ruling Democratic Party, Minister of Economy and Finance Pier Carlo Padoan.

Figure 1

Figure 1.png

Source: Strategas Research Partners

It is notable that this week’s The Economist magazine, always a bastion of market economics, supports a “no” vote. Its view is one that we identified in our October post, namely that some Italians may be voting to keep a powerful Senate as a check against the power of would-be authoritarians, such as the former prime minister Silvio Berlusconi, ‎or perhaps Beppe Grillo, the current head of the opposition Five Star Movement. The movement was founded in 2009 on the belief that the current condition of the government is insufficient, bureaucratic, and corrupt. The group blames elites, whether they are in Rome or Brussels, for Italy’s weak economy.

We are also closely monitoring developments in France, as the major political parties prepare for a presidential election in April 2017. The principal claimants for the post are center-right Republican Francois Fillon and extreme-right National Front leader Marine Le Pen. Since the Brexit referendum, Le Pen has suggested that she would like France to reconsider its membership in the European Union. So far, the market seems to be comfortable with French political risk, but such comfort could evaporate if Le Pen leads the polls. 

Core narrative:

We maintain our benign view on the Italian referendum, which is consistent with our near-neutral tactical allocation weight to developed international equities.

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