After days of delay, Italy’s president Sergio Mattarella accepted unknown law professor Giuseppe Conte as the leader of the country’s new government on Wednesday. Conte will lead a coalition of two rival parties – the anti-establishment Five Star Movement (M5S) and The League, a far right party.
BCC Risparmio & Previdenza’s head of fund selection David Karni said a lot of the potential for volatility in BTPS would depend on whether financial markets accepted the country’s new finance minister.
The coalition has put forward 81-year-old economist Paolo Savona for the job who is known for his strong anti-Eurozone views.
Italian bonds
Karni said a month ago he had decided to cutback his overweight position on Italy because, at the time, he expected the 110 point BTP spread to continue to widen.
“On Wednesday we decided to add more BTPs to our portfolio and this has to do with the divergence between US Treasuries and the (Italian) bonds. Treasuries have moved up in yield, but the bonds are staying put,” Karni told International Adivser sister publication Expert Investor.
“At the beginning of this movement we decided to cut duration because we think the cycle of interest rate normalisation will continue, but currently on the European side, bonds are stable so we decided to go back to a neutral position in duration exposure.”
Karni said he could not see any opportunity currently to increase his BTP position, but that this could change depending on the appointment of the new finance minister.
“BTP spreads were at 190 and this morning it was at 180, so if the market accepts the financial minister it is possible for the bond spreads to return to 150,” he said.
“There is a lack of yield in the market and so BTPs are discounted and I think this is the best risk opportunity in the market. I don’t think we will go underweight.”
Karni noted that if the anti-Eurozone Savona became the financial minister, the market might react heavily to achieve 3% in yield and that this would be an “incredible opportunity to increase the overall yield of the portfolio”. However, he said that this was still a wait-and-see situation.
Italian 10-year government bond yield six months to 24 May 2018
Source: Bloomberg
Volatility
Karni said that volatility would be the key factor along with whether discussions between M5S leader Luigi Di Maio and League leader Matteo Salvini would contrast with the European Union.
“If what the government does is in line with the European Union, then volatility will calm down but if it contrasts then we’ll have an augmentation of volatility,” he said.
“It’s easy to promise things during the election, but it is difficult to maintain the promises. They do have to maintain parliament and this new majority is not really stable.”
Expert Investor previously reported that a victory for M5S would be the worst-case scenario for Italian equity and bond markets.
Equities
Karni said that he still believed that European equities could outperform US equities and that Italy was still one of the best markets due to strong macro figures.
He said investors should be invested in equities over the next year but the next few weeks would be crucial to decide on whether to be overweight in Italy or not.
Karni noted that he was optimistic on Italy’s financial market and he did not think that Italian volatility would produce a global recession or downturn.
