Jean-Baptiste Berthon

Jean-Baptiste Berthon

Senior Strategist, Cross Asset Research

Lyxor Asset Management

Italian Referendum: Wait And Play Contrarian

01 Dec 2016

Active Strategies

The Italian referendum, which aims at making future governments more stable, morphed into a vote of confidence on Renzi.

Markets and polls say "No" will prevail, but without triggering early elections.

      • Polls forecast a non-disruptive “No”, leading to a new government (led by Renzi or not). But with 25% undecided, all bets are still open.
    • Italian and European markets are consistent with this outcome. They price a persisting risk premium in Italy and Europe, not a disruptive one.

Our views on the likely scenarios after the referendum:

      • "Yes" (45% probability) to boost Italian equities +10%, Italian banks +15%, European equities +5%, and to revert the Italian BTP vs. Bund 10Y spread to its recent 100 bps average.
      • “Soft No” with a new government (45% probability) to lead to a moderately higher risk premium in Italy and Europe. Italian equities to drop -5%, Italian banks -7%, European equities -3%, and Italian 10Y spread to rise to 200/250bps.
    • “Hard No” with early elections (10% probability) to translate into a much deeper tail risk, extending to Europe. We expect Italian equities to plunge -10%, Italian banks -15%, European equities -7%, and the Italian 10Y spread to reach 300ps, with the Bund yield weakened by safe haven flows.

We would refrain from positioning before the vote. Post-referendum, we would play contrarian because of the ECB.

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