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Could the Italian referendum disrupt markets?

The Italian referendum has the potential to disrupt European financial markets, even the future of the EU hangs in the balance. But many haven’t heard of this referendum and many more don’t understand the implications this vote could have on global financial markets.

What is the Italian referendum about?

In December Italy will take to the polls to vote in a constitutional reform referendum. Italians will be asked one question: do they approve the change of the Italian constitution to reform the appointment and powers of the senate of Italy? This reform has the potential to remove some of the bureaucracy in the Italian system.

As with any referendum the debate is unfortunately not as clear cut as it appears. The current Prime Minister is in favour of reform, along with most of the left party. However, a minority of the left party and the Anti-European party are against reform.

What makes this vote all the more interesting is that the Prime Minister, Matteo Renzi, has suggested that if he were to lose the referendum then he would step down as Prime Minister, although he has omitted this in more recent speeches, likely due to the uncertainty in the polls.

Renzi is pro-EU so a vote in favour is equal to political stability across Europe. On the other side, the vote against reform, and the potential resignation from Renzi creates political uncertainty. This referendum could lead to questions being raised on Italy’s EU membership, which could in turn trigger the unravelling of the EU as France and Germany take to the polls next year.

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In the latest poll the outcome looks unclear. On 20 October, 48.5% were in favour of reform, whilst 51.5% are against it. But as we know from Brexit, the polls are not always accurate.

Why is the referendum important?

This could have the largest impact on European markets this quarter. A no vote could trigger both political and economic uncertainty in Italy and across Europe, and financial markets hate uncertainty.

Economic uncertainty would come from a potential drop in the value of Italian bonds, and investors may also have a pessimistic view of Italy. With no clear leadership plan in place should the no vote win could impact the EU, at this moment, its crucial Italy have a pro-European Prime Minister.

I’m in the UK how would a vote in Italy impact me?

Even if you don’t have any exposure to Italian markets a yes vote could imply less volatility for UK investors. However, a no vote could cause fluctuations in the value of the Euro which would be good news for sterling. But if there is a strong appreciation in the value of sterling that could trigger a sell off of UK equity, given the recent strength of the FTSE 100 this would be bad news for investors.

What does this mean for investments?

The outcome of this referendum could trigger a spiral of uncertainty across Europe. It could impact Brexit negotiations, and even influence the votes in elections in other European countries. At a time like this it is prudent to be conservative and manage risk tightly. There are likely to be more risks than rewards, a globally diversified portfolio is the best way to manage volatility risk.

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