Just six short months ago this headline could have been about the UK. 2016 has been a year of surprises, from Brexit to Trump, the year will now end with Italians saying no to constitutional reform. Around the world individuals are voting against the establishment.
Matteo Renzi’s decision to step down as a result of the referendum adds another layer of complexity and uncertainty which is likely to cause tremors of volatility throughout the financial markets.
What was the Italian referendum about?
Central to the constitutional reform was the end of “perfect bicameralism”, which is the practice of having two legislative parliamentary chambers. In addition to this, the main points of the reform were:
- Reduction of the number of senators
- Revision of powers between State and Regions
- Abolishing of the Provinces and of the National Council for Economy and Labour
Italians have voted against these measures, which is seen as a rejection of the status quo in Italy. It will be interesting to see knock-on effect around the world, with three nations now voting against status quo, is that enough to predict a global trend?
The likely impact on markets
Renzi’s resignation was at the centre of discussions on the reform, in fact when polled, many Italians believed they were voting on him as a Prime Minister. As Renzi leaves an Italy without the reforms, the nation will enter a transitional phase, which results in a level of political instability. This will likely have an impact beyond Italy, and will raise questions about the future shape of the EU.
Renzi was a famously pro-EU politician, his replacement, whilst still unknown, is more likely to favour a focus on domestic issues and an Italian exit from the EU will likely be debated over the course of 2017. 2016 has taught us that such debates sparks volatility in the markets, as investors try to assess the likely outcomes and impacts on business.
This instability will not just impact Italian stocks but also European stocks. With a UK EU exit on the horizon and an Italian exit now potentially on the cards, the political shape of Europe is less clear. Italy and the UK were two of the founding members of the EU; Italy, in particular, has been a strong voice over the last few years, and some will question whether the EU can survive without both nations.
A globally diversified investment portfolio is the best way to protect wealth in a situation such as this. As we go into 2017 we are likely to get more clarity as Trump’s presidential policies unfold, the vision for Brexit becomes clearer, and the impact of Italy’s vote today comes into focus. Investors need to ensure they have the flexibility in their portfolios to take advantage of opportunities as they arise and minimise risk.