Pixabay CC0 Public Domain. Amundi Acquires Pioneer Paying €3,545 Million to Unicredit
Amundi announces that it has signed a binding agreement with UniCredit in order to acquire Pioneer Investments for an all-cash consideration of €3,545 million. As part of the transaction, Amundi will form a long term strategic partnership with UniCredit for the distribution of asset management products.
With €222 billion of assets under management, a majority being retail assets, Pioneer Investments has a highly complementary business and geographic profile with Amundi, the firms declare in the press release.
Eighth Largest Asset Manager Globally
This acquisition will strengthen significantly Amundi’s industrial project and reinforce its position as the European leader in asset management. It will create the 8th largest asset manager globally with €1,276 billion of assets under management, and will allow Amundi to reinforce its leadership in key European markets. “The combined entity will be number 1 in France, in a top 3 position in Italy and in Austria, and in a strong position in Germany.”
Italy will become Amundi’s second domestic market with €160bn under management, and Milan will become one of the Group’s investment “hubs”. The number of staff in Milan will therefore significantly increase.
The price of the acquisition is €3,545 million. The transaction will be financed by c.€1.5 billion of excess capital, a c.€1.4bn capital increase (rights issue), and c.€0.6bn of senior and subordinated debt. The rights issue will be launched in H1 2017 and will be underwritten by Crédit Agricole Group.
The transaction is expected to close in the first half of 2017.
Commenting on the acquisition, Xavier Musca, Chairman of the Board of Directors of Amundi, said “This acquisition is fully in line with the selective acquisition strategy announced at the time of the IPO: Pioneer Investments will reinforce Amundi’s product expertise, broaden its distribution channels and networks, and generate significant synergies. It confirms Amundi’s position as a clear European leader in asset management, in terms of size and profitability.”
Yves Perrier, Chief Executive Officer of Amundi, added “The acquisition of Pioneer Investments is a major step to anchor Amundi as the European leader in asset management. This acquisition will reinforce Amundi’s industrial model and will benefit our clients whilst creating significant value for our shareholders. Pioneer Investments is a world class asset manager that has a highly complementary business and geographic profile. At Amundi we are all excited to welcome soon our new colleagues who will join us in a leading asset management group fully dedicated to serve its retail and institutional clients.”
Pixabay CC0 Public Domain. Time Is a Terrible Thing to Waste
Investors’ misperceptions about what impacts their outcomes often make them spend too much time measuring what doesn’t matter and not enough time on what does. It’s time to start looking at what really counts when choosing an investment manager.
Investors have a tougher job today than ever before. They’re taking more risk than in decades past in order to achieve similar returns. And they’re doing so against a backdrop of geopolitical and market uncertainty — things they cannot control, but still must take into consideration. Understandably, that sense of uncertainty, coupled with the need to take more risk, is driving investors to focus on what is tangible and easy to measure — in an effort to gain some sense of control.
We see investors spending a lot of time anchored to short-term past performance — three year returns dominate decision-making for example — as well as tracking traditional, price-momentum benchmarks that point more to changes in prices than true, long-term value. But these metrics don’t matter as much to investment outcomes.
So it’s time to have a disruptive conversation. We want to help investors get back to spending time on what they know has always counted more — people, process and philosophy, but also a healthy dose of honesty around time horizons.
However, in a world that has become so short-term focused, that is a significant hurdle. Lack of clarity around time horizons appears to be a growing convention, and it’s tough to break with popular sentiment, especially at a time of greater angst. Markets are more complex and finding returns is more challenging. But here is an important truth. Looking at what is easy to measure (e.g., endless data comparisons) only creates the illusion of control, and feeds into ambiguity aversion — a known behavioral bias that kicks in because we don’t like uncertainty.
Also, short-term micro-measurement doesn’t help forecast the future, generate returns or meet investors’ long-term goals. Rather, it causes pro-cyclical (herding) behavior among investors, which, as noted by the International Monetary Fund in a paper on countercyclical investing, takes them away from their inherent “edge as long-horizon investors.“
While investors do spend considerable time evaluating the harder to measure key attributes of investment managers during their search process, they tend to brush those metrics aside in post-hiring evaluations, especially in times of short-term underperformance. It may be common practice to revert back to performance measurement, but there is a danger in relying too heavily on what doesn’t persist.
As you can see in the exhibits below, even the top-performing managers don’t stay on that pedestal from period to period. For example, of the managers who performed in the top quartile from October 1990 to September 1995, only 25% remained in the top quartile in the subsequent period from October 1995 to September 2000, while the rest dropped down to lower quartiles. On the other hand, looking at the second exhibit, which shows what happened to bottom quartile managers over the same time periods, 27% of these managers went from the lowest performance ranking to the top performance ranking in the subsequent period.
An investment manager’s people, process and philosophy — which reflect the strength of its collective intelligence, culture and the management of its talent and business, tend to be far more persistent. Why does that matter so much to investors? Because these qualities may reflect a manager’s ability to go against the grain when necessary, applying its insight toward finding opportunities other managers may be missing and potentially recognizing risks that others may not. In short, investors want to see signs of a manager’s power to be countercyclical.
The harder-to-measure manager attributes are also highly relevant to the environmental, social and governance (ESG) conversation. We believe ESG is often misconstrued as more of a social/responsible investment decision. That has driven some investment managers to respond with a relevant product set. In reality, ESG is much more about trying to invest in good businesses rather than bad — finding those with true long-term value by understanding what factors (e.g., good management, effective capital allocation and superior products and services) are material to a company’s sustainability and competitive advantage. Integrating those considerations into the investment process — whether you’re an investment manager selecting securities or an asset owner selecting an investment manager — could reduce risk and potentially improve returns over time. But it takes patience and robust research to understand what is material over the long term.
Passive management typically does not integrate ESG factors, and yet we believe these considerations are more important than ever to “getting it right” for the investors we serve. But getting it right depends as much on the investor as it does on the investment manager. Investors’ time tolerance has to align with how their investment managers make decisions within their portfolios, or the resulting misalignment could damage both expectations and outcomes. For example, portfolio turnover is an important consideration in aligning investor horizons and manager decision making. When investors see an active manager with low portfolio turnover (i.e., a longer-term focus), they can better understand why that manager would need a full market cycle to generate alpha.
The work we do as an industry to improve the misalignment between investor time horizons and investment manager decision making is really about improving trust. Because ultimately investors need to trust a manager’s skill long enough to allow it to work.
Carol W. Geremia is President of MFS Institutional Advisors, Inc. Co-Head of Global Distribution.
. Michelle Scrimgeour, New CEO EMEA at Columbia Threadneedle Investments
Columbia Threadneedle has appointed Michelle Scrimgeour as chief executive officer, Europe, Middle East & Africa (EMEA) and CEO of Threadneedle Asset Management Limited.
She will also join the executive leadership team of Ameriprise Financial, Columbia Threadneedle being the global asset management group of Ameriprise Financial.
Scrimgeour joins from M&G Investments, where she holds currently the roles of chief risk officer and director of M&G Group Limited.
Prior to joining M&G, she worked at BlackRock where she was a member of the European executive committee which led the firm’s $1trn EMEA business and oversaw the integration of BlackRock and BGI in London.
Formerly, she has also been chief operating officer for international fixed income; global head of Fixed Income Product; head of Alternative Investments and held senior roles in the quantitative equity and transition management businesses of Merrill Lynch Investment Managers and Mercury Asset Management (now known as BlackRock).
Commenting the appointment, Ted Truscott, global CEO of Columbia Threadneedle, said: “Michelle joins Columbia Threadneedle at an exciting time as we further build our global business and continue to focus on delivering successful investment outcomes and solutions for our clients.”
As of 30 September 2016, Columbia Threadneedle managed €416bn in assets.
CC-BY-SA-2.0, FlickrPhoto: Mark Morgan
. 2017 Outlook: Optimistic, but Not Euphoric
Optimistic, but not euphoric, is how Stefan Kreuzkamp describes his outlook for the international financial markets over the coming year. Yields only in the mid single figures is the best that can be expected right across all asset classes, according to the Chief Investment Officer at Deutsche Asset Management. Correct selection and diversification of investments will be even more important than last year. In principle, Deutsche AM favours investments with strong income components – such as good payers of dividends, selected higher-yield bonds as well as alternative infrastructure and real estate investments. “We are not pinning our hopes for economic growth and capital market returns very high for 2017. Having said that, we have no concerns that we will see recession in the major economic regions. However, political and central bank actions may continue to prompt short-term dips in the market,” said Kreuzkamp.
The political scene remains the biggest unknown in Kreuzkamp’s view: the unresolved Brexit issue and elections in some key European countries mean that the spotlight is firmly back on the future of the European Union (EU) as well as nationalism and protectionism. In recent times, EU opponents have gained some ground. Regional conflicts, such as Syria and Eastern Ukraine, continue to inflate and to rage. This is topped by Russian and Chinese foreign policy ambitions.
Politics shapes markets
Kreuzkamp believes that developments in the US are extremely important. In his view, President-elect Donald Trump is entirely capable of shaping the markets in a sustained way. This is especially true as a Republican-dominated congress could grant him considerable room for maneuver. “A combination of tax cuts, deregulation and infrastructure projects could stimulate the US economy to the extent that this boost could continue for eight or even nine years. But this will bring inflation,” said Kreuzkamp.
The financial markets have already given their initial reactions. But it is also conceivable that investor enthusiasm could soon fade somewhat. On the one hand, this could be the result of plans will not be executed as quickly as many in the markets would hope, and on the other hand, the flip side of Trump’s policies could rear its head again – for example restrictions on free global trade. But it is a matter of pure speculation if Trump really will, or will be able to, pursue protectionism – isolation would squeeze the competitiveness of American companies if costs were to increase. In this respect, Deutsche AM expects to see the pace of growth and inflation pick up only slightly during 2017. “We will be reviewing all our positions regularly in line with US political developments. We are fully aware of the President-elect’s potential to surprise – in both directions. Politics shapes markets”, explained Kreuzkamp.
In global terms, he expects to see growth of 3.5 per cent, which would make 2017 the eighth consecutive year with growth above 3 per cent – something last seen in the 1960s. An economic upturn is also expected in the Eurozone. For 2017, Deutsche AM expects to see growth of 1.3 per cent – mainly driven by consumption.
Strong dollar
In the bond and currency arena, this coming year will initially be marked by even more divergence in central bank policies with a knock-on impact for the US dollar. Two further interest rate hikes are anticipated in the US – following the move in December 2016 – yet the EU is expected to remain at its low levels and continue to actively pursue its bond buy-back program well into next year. Nevertheless the so-called tapering phase may then begin.
Next year the expectation is that the US dollar will remain strong. “We are assuming that the lowest interest rate is now behind us, but we are not counting on sustained increases. In 2017, key European countries and the US are likely to see negative overall yields from sovereign bonds. Interest rate divergence between the Eurozone and the US is likely to increase. In the medium term, we are not convinced that this era of very low interest rates is at an end, although 2016 may well have marked the lowest point for interest rates,” said Bill Chepolis, Head of Fixed Income EMEA at Deutsche AM. From an investment point of view, Deutsche AM continues to pursue its preference for corporate bonds in Europe and the US, as well as sovereign bonds from peripheral European countries. Within the emerging markets grouping, there are attractive hard currency sovereign bonds, even if these are subject to a higher level of price volatility.
Manage risk actively
Deutsche AM estimates the international equity markets will achieve single digit growth, but the situation differs widely across the important markets with US indices recently setting new records. Unfortunately any prognosis remains very difficult because of the uncertainty surrounding Trump policy. US equities could indeed benefit from deregulation and a new fiscal program, but this could be subdued by a strong dollar and wage pressures. Rising interest rates would tend to preclude increasing equity prices. In emerging markets, a higher US interest rate is just one issue that could fuel uncertainty. Having said that, emerging markets are witnessing an economic recovery which could benefit European equities, most especially in Germany, emphasised Thomas Schüssler, designated Co-Head of Equities at Deutsche AM. He points out that recent corporate figures out of Europe have started to look promising again. At the moment, stock exchanges have priced in a degree of political risk which explains the gap in valuations with the US. However, Schüssler believes it is precisely this that offers potential for a positive surprise.
Overall, volatile and sideways-moving markets tend to be a rich source of opportunities if investors are active, selective and tactical. In particular multi-asset investments should prompt considerable demand from investors: “With prospects of returns so poor, investors have to be prepared to actively manage risk – in the year to come this will be the key to successful investment. The challenge lies in optimising the risk versus a stated return objective”, said Christian Hille, Head of Multi Asset at Deutsche AM.
Foto cedidaCarlos Albiñana, socio de Jones Day. Carlos Albiñana Joins Jones Day in Madrid
Jones Day has hired Carlos Albiñana to the Firm’s Tax Practice in its Madrid Office.
Albiñana provides clients tax advice on capital markets, M&A and restructuring, banking and securitization, real estate, derivatives, project finance, and asset-finance transactions. He also has substantial experience in tax litigation and incentive schemes.
“Carlos is an excellent addition to our Tax Practice,” said Joseph A. Goldman, Co-Leader of Jones Day’s Tax Practice. “With more than 25 years of experience providing local and cross-border tax advice for global clients, Carlos has a well-deserved reputation as a leading tax lawyer in Spain. His arrival further expands our capabilities to offer clients a full range of tax-related transactional services in Spain.”
Albiñana has represented numerous clients in their tax structuring in Spain, advising leading companies in the financial, industrial, energy, telecommunications, and construction sectors. He has extensive experience in cross-border transactions working with clients to structure their investments in the most tax-efficient manner.
“The addition of Carlos to our office in Madrid will strengthen our Tax Practice, as he joins our senior tax counsel with years of experience advising our clients. He will be of great help to our M&A, Banking & Finance, and Real Estate teams” said Mercedes Fernandez, Partner-in-Charge of Jones Day’s Madrid Office. “We are delighted that Carlos joins us as we continue to focus on providing exemplary client service.”
Albiñana is a recognized leading lawyer by Chambers Europe and Best Lawyers in Spain. He is also a professor at the IE Law School where he regularly lectures and leads a number of executive tax programs.
Jones Day is a global law firm with 44 offices in major centers of business and finance throughout the world. Opened in 2000, Jones Day Madrid is a full-service office with more than 40 locally-qualified Spanish lawyers and significant experience handling a wide variety of national and cross-border transactions and disputes.
Foto cedidaAris Prepoudis, courtesy photo. Aris Prepoudis, New CEO of RobecoSAM
RobecoSAM, the investment specialist focused exclusively on Sustainability Investing (SI), has appointed Aris Prepoudis as CEO from January 1, 2017, subject to FINMA approval. He will take over from Reto Schwager, who has led the company as interim CEO since August 2016. Schwager will continue to perform as Global Head of Private Equity and a member of the Executive Committee.
Albert Gnägi, PhD, Chairman of the Board of Directors, RobecoSAM: “The Board of Directors is delighted to appoint Aris Prepoudis as the new CEO for RobecoSAM. Prepoudis brings to the company the ideal set of skills, an entrepreneurial mindset and a passion for Sustainability Investing. These qualities will be instrumental for continuing innovation and fostering profitable growth opportunities at RobecoSAM. The Board of Directors would also like to thank Reto Schwager for his commitment as RobecoSAM’s CEO ad interim, and for providing consistent leadership during the transition.”
Aris Prepoudis, appointed CEO, RobecoSAM: “I am proud and honored to be named as CEO of RobecoSAM, the pioneer and global leader in Sustainability Investing for over two decades. I am looking forward to shaping the SI landscape by delivering cutting-edge asset management solutions to our clients. As the CEO, I will focus on profitable growth, further develop our expertise and leverage on the burgeoning interest in Sustainability Investing around the world.”
Aris Prepoudis, a Swiss national, served until recently as CEO of Vescore (formerly Notenstein Asset Management), an asset manager specializing in sustainable and quantitative investments. Previously, he was Head of the Institutional Client Business Unit at Notenstein Privatbank, where he led the consolidation of all the asset management activities of Raiffeisen Switzerland into Notenstein Asset Management. From 2000 to 2013, Prepoudis worked at Bank Sarasin & Cie AG in various senior positions, culminating in the role of Global Head of Institutional Clients. He began his career at STG Cooper & Lybrand (now PwC) and subsequently worked at ATAG Ernst & Young as an audit manager for Swiss Mutual Funds and Banks. Prepoudis holds a Bachelor of Business Administration from the University of Applied Sciences in Basel.
Foto cedidaPhoto: Mark Mobius, Executive Chairman at Templeton Emerging Markets Group / Courtesy photo. Mobius: “A Period of Bilateral Agreements between the U.S. and Emerging Markets is Opening Up, offering Great Opportunities, even for Mexico”
“Mexico is not going to disappear because Trump has arrived at the White House. Its oil will still be there, and so will its manufacturing capacity, and if the U.S. market closes up to it, there will be other markets that want to buy products Made in Mexico, especially with such a cheap Peso.” This quote sums up the opinion which Mark Mobius, Executive Chairman at Templeton Emerging Markets Group, and a Portfolio Manager of Franklin Templeton’s emerging equity strategies since 1987, holds on emerging markets following Trump’s victory: we must not fear a debacle.
In an interview with Funds Society, Mobius talks about one of the main concerns of investors in emerging markets looking forward to 2017: what will happen to these markets once Trump is president? Returning to Mexico’s case, which is probably the most vulnerable country due to its hefty trade balance with the United States: “Given that Trump is primarily a businessman, I think he will reach a bilateral agreement with Mexico that will ultimately be beneficial to the country. Problems related to drug cartels and organized crime are common for Mexico and the United States, so it makes sense for both countries to work together to solve them.” The solution, Mobius says, may involve negotiations to help normalize the movement of people, “but I think they will eventually come to an understanding.” In fact, for Mobius, Mexico now offers tremendous opportunities: “The Mexican peso cannot drop much more from current levels, at least on a sustained basis. We estimate that it is already slightly undervalued.”
On comparing Mexico to Brazil, one of the markets that Mobius has favored in its emerging equity strategies for a longer period of time, he points out that the Brazilian economy has suffered a much greater punishment than Mexico, with two consecutive years of GDP contraction, and is now in full recovery phase with ongoing structural reforms that Mexico has yet to undertake. “Mexico’s dialogue with the Trump administration could be a catalyst for the adoption of these reforms, which in the end would be very beneficial to the country,” says Mobius.
As for the Asian continent, Mobius does not see a negative effect for China due to Trump’s victory. “The countries receiving the most aid from the United States are Japan, South Korea, and to some extent also the Philippines. With Trump, these countries may have to redefine the terms of their relationship with the United States by increasing their contributions, so they may face additional pressure in their budget that should be monitored.”
The United States spends about USD 5 billion a year on maintaining its military bases in Japan, and another USD 2 billion on bases in South Korea. Donald Trump has questioned this expenditure throughout his campaign, as well as the usefulness of these military bases to maintain stability in the Asia-Pacific region. Political experts in this region point out that China has been hoping for the United States to withdraw its troops from Japan and South Korea for a long time, which now seems more plausible.
Mobius believes that China has favored Trump over Clinton from the very beginning, because it believes that he is willing to negotiate. “We will not see so much cold-war-like rhetoric in China-US relations, so negotiations will be easier.” Something similar, but even more pronounced, happens with Russia, a country with which the United States has reestablished dialogue. “If Trump is not going to allocate so many resources to the Middle East, dialogue with Russia becomes essential.”
Overall, Mobius believes that the multilateral treaties in which the United States participates will be weakened, but many opportunities are opening up in US bilateral agreements with individual countries, which will be positive. He does not anticipate a steep crises in emerging market equities and forecasts a return of inflows once specific measures by the president-elect, or the absence of them, become public.
Faced with the FED’s rate hikes – which seem much more likely after Trump’s victory- it is foreseeable that in future US Treasuries will return to a much more attractive yield than currently, which will be beneficial for emerging markets equities,” says Mobius. “There is a perception that equities fall when the FED raises rates, but if we look at history we see that there is no correlation.”
Pixabay CC0 Public Domain. Active European Equity Funds Set to Continue Outperforming U.S. Counterparts
European equity funds with conviction and strong performance could lead the way in reversing outflows in the sector caused by a combination of Brexit, stretched valuations, and weak earnings that has sent investors elsewhere, according to the latest issue of The Cerulli Edge – European Monthly Product Trends Edition.
Cerulli Associates, a global research and consulting firm, notes that active equity funds in Europe have fared considerably better than their counterparts in the United States. A study by S&P Global shows that 90% of active U.S. equity funds tracking the S&P 500 underperformed the index in the three, five, and 10 years to the end of June 2016. In contrast, 63.8% of active equity funds in Europe underperformed the S&P Europe 350 over three years.
“To put it in a more positive way, over 36% of active funds matched or beat the index. Whether it is the result of the more disparate nature of the European markets or other factors, Europe clearly has more active funds outperforming than the United States,” says Barbara Wall, Europe managing director at Cerulli.
She points to companies such as Allianz Global Investors with its sizable funds that have outperformed over one, three, five, and 10 years. “The funds’ clear sector stances, such as overweighting industrials, seem to have paid off. Some funds can achieve outperformance just by underweighting one major sector.”
The performance of the finance sector over the past couple of years serves as an example, according to Wall. “Amundi’s Europe Conservative fund has underweighted this sector, which makes up just 4.45% of the portfolio. In the three years to September 2016 the fund gained 29.5%, compared with 18.4% for the MSCI Europe, in which financials are 19.5%.”
CC-BY-SA-2.0, FlickrPhoto: Ainhoa Sanchez Sierra. Millennials Put Greater Importance on ESG Factors
The Schroders Global Investor Study 2016, which surveyed 20,000 end investors in 28 countries, found that millennials (aged 18-35) are more likely to place greater importance on Environmental, Social and Governance (ESG) factors than older investors (aged 36+). The survey found that the millennial generation ranked ESG factors as equally important as investment outcomes when considering investments decisions. The study also highlighted that global investors would hold ESG investments for an average of 2.1 years longer than their usual investments.
Millennials demand for ESG
ESG factors such as corporate governance, social responsibility and environmental impact issues, such as world poverty and climate change, were all significantly more important to millennials than to the older generations in their investment decision. Opinions between these two age groups differed the most on world-based social outcomes, like poverty and climate change, with millennials rating these highly (7.2/10) compared to older investor groups (6.4/10), on average. The study also concluded that millennials were more likely to actively pull funds from companies with poor ESG records, companies associated with weapons manufacturing/dealing or linked to repressive regimes would be the primary causes of this.
Most groups of investors are looking for good corporate governance, with the issue topping their list of ESG concerns. However, millennials again appeared to show more concern rating it an average of 7.4/10 compared to older investors rating it 7.0/10.
ESG an alternative to short-termism
The study found that global investors would stay invested in ESG investments longer than usual, with 82% indicating they would do this. Over a third (38%) said they would stay invested in companies with positive ESG philosophies for at least two years longer than they would stay invested in their usual investments.
The value of ESG
On average, global investors rated ESG issues as less important when making an investment decision, than tangible, long-term growth, which they rated 7.8/10. However, global investors still rated positive ESG factors highly at 6.9/10 on average, indicating a high degree of importance placed on both issues. Many experts would argue the two considerations are inseparable.
Jessica Ground, Global Head of Responsible Investing at Schroders, said: “The interest in ESG and corporate governance issues for investors only looks set to grow given its prevalence amongst millennials. While returns are still the most important issue, ESG’s importance to end investors means that these factors are too big for any advisor to ignore… It is important to continue to educate investors on the value and added return ESG can provide. While many policymakers are concerned about the rise of short -termism in markets, encouragingly, those surveyed said they would stay invested in ESG philosophies longer than they would in other investments. It is important that investors recognise the value of being invested for the long term and this is especially relevant when considering ESG factors. ”
For more information on the study results follow this link.
CC-BY-SA-2.0, FlickrMatteo Renzi, after the referendum. Italy Starts a Period of Uncertainty After Matteo Renzi's Defeat
On Sunday, the populist wave spreading across Europe saw a defeat in Austria after the Green Party’s Alexander Van der Bellen won 53.3% of the votes versus Hofer’s 46.4%. However, in Italy, with around 60% of voters opting for a “no”, and nearly 70% turnout, Italians firmly rejected an important Constitutional reform that would have removed power from the Senate and left the Lower House as the key legislative Chamber in Italy. The reform was one of the flagship measures of PM Renzi, who has already confirmed he will tender his resignation.
Patrice Gautry – Chief economist, Union Bancaire Privée (UBP) believes that “a period of political uncertainty is coming back on Italy, with rising difficulties to form a government coalition or to find a clear majority. No time for the government to engage new economic reforms in front of political uncertainties.”
According to Nicola Mai, Head of European Sovereign Credit Research at PIMCO the result is negative at the margin for Italian and European risk assets, for a couple of reasons:
First, the reform’s failure means that Italy has lost an opportunity to make its political system leaner and more conducive to reforms.
Second, Renzi’s resignation is likely to lead to a period of higher political uncertainty which comes in the midst of ongoing recapitalization efforts in the Italian banking sector.
However, he believes that negative market sentiment on the vote is likely to be mitigated by the fact that the market has been expecting a “no” (based on polls) and that the ECB, which will meet next Thursday remains in play in European sovereign markets. Although originally they experienced losses, shares in Italian banks have rallied this morning. “Tail risk is sentiment deteriorating significantly on Italian banks and infecting other Italian and European risk markets.” Mai points out stating that the referendum outcome makes the recapitalization of Monte dei Paschi harder to achieve, with potential negative knock-on effects on the rest of the system and in particular on Unicredit’s equity raising plans, which today announced is in exclusive talks with Amundi for the sale of Pioneer Investments.
The Amundi team considers the Italian referendum is particularly important for portfolio construction for several reasons:
The markets doubt in Italy’s ability to make the reforms needed to revitalise its economy, which is a problem in a country where the debt-to-GDP ratio is well over 100%. The referendum is merely adding uncertainty to an already complex situation;
It comes at the end of a year of political surprises that caught out some investors;
It is being held just days before two much-awaited central bank meetings (ECB and Fed), which will only add to market jitters;
The markets’ capacity to absorb heavy trading flows at the end of the year is, at best, reduced, and this is stoking fears that volatility will rise. This is particularly true as the Italian market’s interest rate futures are also used to hedge positions on other premium-based markets (the credit market, for example) when liquidity is tight.
In terms of next steps, President Mattarella will seek to facilitate the formation of a transition government, headed by a political or technocratic figure, tasked with leading through ongoing bank recapitalizations and reforming the current electoral law (which is currently inconsistent between the two Chambers). This will take some time, and elections are unlikely to be called until this is done (until mid-2017 at the earliest). The new electoral system is likely to be proportional in nature, and facilitate the formation of grand coalition governments in future.
The people “have spoken in a clear and unequivocal way… we leave with no regrets,” said Italy’s Matteo Renzi, before tendering his resignation. According to Allianz GI, Italy’s rejection of reforms and Renzi’s resignation may lead to early elections or other scenarios that could spook investors already facing a tumultuous political year in Europe. Then again, markets may have already discounted future bad news, and the ECB stands ready to step in.
