28 February 2018, 18:08 GMT
This content was first published on 5 February 2018
By now, most people agree that a clear winner of the Italian election on 4th March is unlikely due to the new electoral system. A probable hung parliament will create the necessity of broad coalition talks.
However, it’s an Italian election and there is always the risk of surprises. For instance, it could be a right-wing victory with Berlusconi (ousted from Parliament and barred from holding office until 2019) potentially one of the main stakeholders and likely kingmaker. The Five Star Movement (M5S), which received a lot of press coverage over the past few years due to their populist manifesto, has taken ground from Berlusconi, especially in the south of Italy. But an outright victory of M5S would still be difficult to achieve under the recently reformed electoral law.
How is this election different?
This will be the first Italian election where a "uninominali" (first past the post) system will be used together with a proportional system. This has two important consequences. Firstly, MPs who are elected with the first past the post system could be more independent from party direction, increasing scope for changes of party allegiance after the election, more so than in previous elections. Secondly, it makes coalitions more likely.
What happens if there is no clear winner?
A coalition would be likely. The lengthy political horse trading will start right away and the first milestone will be the election of the presidents of the chambers within a couple of weeks. The names chosen will indicate where coalition talks are going.
In such a scenario, it’s unlikely any party would be willing to step up and take the mandate from the president to form a government as several compromises would have to be made. As a result, a coalition of the largest parties - Democratic Party (PD), Forza Italia (FI) and M5S - would be the most obvious partnership. Strategically this may not prove a wise move for the M5S, who have won over voters predominantly with their anti-establishment profile and their unwillingness to “collude” with traditional political parties. However, it could signal the beginning of a new phase for the movement, shifting it towards a mature political force.
Impact on markets
Our base case remains for a benign, market friendly outcome. However, with the elections now just over a month away, I’m going to be closely watching M5S as we believe they are more willing to form broad coalitions than the market currently assumes. It should mean that the tail risk of a core-populist led government is smaller and the odds are tilted in favour of a more responsible outcome. Having said that the probability of the most market friendly outcomes (FI+PD or a centre-left only) remains on the low side. In the short term, this caps the upside on BTPs in our opinion, and it remains to be seen whether M5S can elevate from pure populism or whether they will be another leopard that cannot change its spots.
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results. These materials are provided for information purposes only and are intended only for the person or entity to which it is sent.
These materials do not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities or investment product. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. They are valid only as the of the date indicated and are subject to change
This material was created by Fidelity International. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
This content may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organisation that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice personal recommendations based on individual circumstances.