The recent turmoil in the Italian elections may have created a buying opportunity for investors with a bit of appetite for risk, but more importantly it may just prove that markets perform much better when politicians don’t try and get involved in the economy.
On Tuesday last week, European markets were smashed as the EuroStoxx50 was down more than 3%, the German Dax was off more than 2% and the FTSE MIB Index, which tracks Italian shares was off nearly 5% in intra-day trade.
Peter Garnry, an equity strategist at SAXO Bank, pointed out that while many of the financial news sites believe that a political stalemate in Italy will be a bad thing, Belgium has proven that this is not necessarily the case. For 535 days, which ended in December 2011, Belgium went without a formal government.
Garnry told clients: “The results were better than expected economic growth and better overall performance compared with its peers, including a better than first forecast of their budget deficits. Back then, newspapers were full of stories about the catastrophe of no government in Belgium, but the irony is that it did not matter.”
He further argues that all eyes should be on Spain, which is demonstrating far less fiscal responsibility.
But on the subject of Italy he does warn: “However, everything is not rosy about Italy. As the chart below shows, Italy’s big
Italy’s nominal growth
Eurozone countries gest problem is its lack of growth with nominal GDP growth being lower than the country’s five-year financing rate since early 2008. Even more impressive, this lack of growth has occurred in a period with loose fiscal policies and rapidly rising government debt. The debt-to-GDP ratio is expected to stabilise this year, but that will do no good if growth does not return to the Italian economy.”
Derry Pickford, a macro analyst at asset management firm Ashburton, says that so far European policymakers have managed to avoid disaster, and he believes that they
A voter casts his ballot at a polling station on February
24, 2013 in Rome, Italy