Investors Are Making Plans for Europe's Next Populist Surge

  • Dec. 4 referendum gives movement a chance to oust Renzi
  • Five Star officials meet managers of two U.S.-based funds

Preparing Your Portfolio for the Italian Referendum

Investors are starting to wake up to the Five Star Movement in Italy.

With the populists’ efforts to topple Prime Minister Matteo Renzi gaining traction, investment funds are trying to get a handle on the policy plans of the anti-establishment party. Surveys signal opponents spearheaded by Five Star could narrowly defeat Renzi in a referendum on constitutional reform on Dec. 4, potentially triggering an election in early 2017.

Italian government bonds were hit particularly hard last week as yields rose around the world in the wake of Donald Trump’s victory in the U.S., reflecting investors’ concerns that the upset will add impetus to Five Star. The party, which wants a referendum on Italy’s euro membership, is running neck-and-neck with Renzi’s Democratic Party in polls and already seized control of city halls in Rome and Turin this year.

“We’re taking Five Star more seriously, we’ve been looking at their program -- even if we have been focusing much more on Trump’s program,” said Andrew Cormack, London-based global portfolio manager at Western Asset Global Management Ltd, which manages assets worth more than $440 billion. “The repercussions of Italy leaving the euro area would be huge. And there is a concern over the lack of experience in the Five Star party,”

Trump rallied his supporters on Nov. 8 with vows to “drain the swamp” of establishment corruption in Washington. Now investors are watching developments in Italy, Austria, France and the Netherlands where populist groups are challenging the traditional political powers ahead of votes over the next few months.

Yields Spike

Italy’s 10-year yields breached 2 percent for the first time in 14 months last week and rose to 2.06 percent on Monday. The spread over similarly dated Spanish bonds was 54 basis points, close to its widest in almost five years.

The forces arrayed against Renzi are a jumble of opposition parties -- from Silvio Berlusconi’s Forza Italia to the separatist Northern League -- and dissidents inside Renzi’s own party, as well as former Constitutional Court judges and other magistrates, philosophers, historians and trade union leaders.

At the forefront of the “No” campaign is Five Star. Founded as a maverick web-based movement in 2009, the party has risen to become one of European Union’s biggest insurgent forces. Echoing the anti-EU stand of populist parties like France’s National Front, it wants a referendum on Italian membership in the euro area, and more leeway for public investment within the bloc’s budget rules.

While the group has ideological difference with many of the other opponents of Renzi’s reform, the temporary front could prove a stepping stone to national power. The party is aiming to push Renzi out after the vote and then win the subsequent election.

Polls Tighten

The prime minister is fighting back, arguing that his plans to curb the powers of the Senate will bring greater stability to a political system that has seen 63 different government since World War II. But he acknowledges he made a crucial mistake at the outset of the campaign -- by promising to quit if he loses, Renzi has turned the vote into a referendum on his premiership for many Italians, just as his personal popularity is declining.

“I’m not capable of staying in the swamp,” Renzi said in an interview on state-owned RAI television on Sunday evening. “You stay in power as long as you can change things.” The premier stopped short of saying explicitly he would quit if he loses, saying: “Politics isn’t the only thing that counts in life.”

Five Star has closed to within touching distance of Renzi in national polls since its victories in June’s local elections. A survey by the Ixe institute published Nov. 11 put Renzi’s Democratic Party on 33.5 percent of the vote, against 28.5 percent for Five Star. The Northern League was on 12.9 percent and Forza Italia had 10.8 percent. The margin of error was 3.1 percent. As Bob Janjuah, a senior independent client adviser at Nomura International, observed after the U.S. election, pollsters have systematically underestimated the populist vote in recent ballots.

“Investment funds see us as a force which could be in government in the near future and they invest for the medium- to long-term,” Stefano Buffagni, a Five Star regional councilor in the Lombardy region, said in a phone interview.

Meeting Investors

Buffagni, a business consultant, said he and other party officials spent two hours answering questions from two U.S. investment funds in Milan on Nov. 3. He declined to identify the funds, saying they each managed about $40 billion in assets.

“We told them about our plans for a guaranteed minimum income to boost growth, and about the weak policy tools Italy has inside the euro area because of the European Central Bank and the European Commission,” Buffagni said.

Buffagni also explained Five Star’s plan to use state-controlled bank Cassa Depositi to buy shares in the troubled lender Banca Monte dei Paschi di Siena SpA and then use a golden share to wield control.

“Investors have considered Five Star much more seriously since Virginia Raggi won the Rome mayoral election in June,” Ugo Lancioni, a money manager in London at Neuberger Berman Group LLC which oversees about $250 billion, said in a phone interview. “People want to understand how the anti-establishment wave of Brexit and Trump would affect Italy.”

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