The Italian referendum duly delivered the no vote, along with prime minister Renzi’s resignation. The euro fell, again, the stock market quickly recovered its poise, Italian banks fell, and then likewise recovered. All rather predictable. Journalists love to try and make a crisis out of not much of a drama, and this was a classic example. The vote was a considered another move by popularists against the establishment, another vote that could undermine the strength of Europe and the euro. We should all know by now bad news is good news for stocks, particularly when it weakens the domestic currency.
This was a vote against Mario Renzi, plain and simple, he had failed to deliver the public the economic growth promised. Unemployment remains high, economic growth weak. One could argue that part of the reason for this failure was the euro, and the constraints of being part of the European Union, but the blame was left at the door of Mario Renzi.
Italian prime ministers have a similar life expectancy in the job as a premier league football manager. There have been 63 of them in the past 70 years. As Mr Renzi came to power in 2014, he had already out stayed his welcome.
On Thursday Mario Draghi will announce the latest rate decision from the ECB. Expectations are that the bond buying program will be extended beyond March. Should this not come to pass then perhaps equity markets might take a slightly dimmer view of the Italian vote.
Equity fund managers and analysts have believed for the past 2 years’ that European equities have offered better value than US ones, and have weighted portfolios accordingly. That has not worked, not only has the currency gone against them but so has the performance of the share prices. The S&P 500 hitting new highs, in comparison European indexes returns have been negative over the past year.
One can only imagine the discussion among market strategists and fund managers this year as they prepare their forecasts for the year ahead. Why own European equities? the political uncertainty, lack of economic growth, etc. will continue to dull returns. Buy US equities instead, Donal Trump’s fiscal measures will boost earnings, the currency should remain strong as the Fed looks to raise rates further. It is a no brainer, as the towel will be thrown in. We shall know soon if our prediction is correct, as the forecasts for the coming year and the last fund managers surveys for the year will be released. All we do know is that equity markets move in the direction that causes the most pain.