World Economy

Italy Vote May Cause Stock Market Crash

Matteo RenziMatteo Renzi

A ‘no’ vote at the Italian constitutional referendum on December 4 could trigger a 20% sell-off in Italian stocks, with the banking sector hit the hardest, according to one investment bank.

“The bear case scenario for the equity market is a ‘no’ vote, in our view, that was then followed by (Prime Minister Matteo) Renzi standing down and a caretaker government being put in place until the next election.

In this case, Italy could face policy paralysis within a political vacuum. We would see this as a significant risk-off event that might trigger a further sell-off in the Italian equity market of around 10-20% from current levels,” according to analysts at HSBC, News Market reported.

In the advent of a ‘yes’ vote, HSBC expects a short-term relief rally in the region of 5%-10% from current levels, led by the financials.

“However, we doubt whether any upward move would be sustained given the broader problems facing the Italian economy.”

HSBC highlights that Italian banks could be the most impacted sector from the referendum, whatever the outcome, given their high gearing to the real economy (strong loans/GDP correlation). A ‘yes’ vote would trigger a short-lived rally, while a ‘no’ vote would trigger sell-off.

  Negative Fundamentals

Renzi previously said he will resign after a ‘no’ vote, but is now being coy. But it all depends on whether Renzi still holds the reins, says HSBC, with a ‘no’ vote representing “a buying opportunity longer term, in our view, if the Renzi government remains in place and Italy remains committed to the EU. On the other hand, should Renzi resign, we believe banks should underperform, driven by political uncertainty and negative fundamentals.”

The bank also sees the utility sector suffering from any political developments as historically, uncertain political developments or the weakening of the domestic sovereign outlook have implied a negative market sentiment for the utility sector.

HSBC also warns to keep an eye on Telecom Italia–a ‘no’ vote is likely to hit its value–and energy giant ENI where a negative vote “would have limited practical implications for ENI’s business, but raises the potential risk of a change in management, because the government can influence this through its stake.”

The referendum vote is intended to make it easier to have more stable governments in the future, capable of serving a full five-year term–Italy has had 63 governments since 1945–making it easier to deliver reforms without the fear of being overturned by the upper house, which is what has tended to happen in the past.