We have been looking at the charts, very much the heart of our process, and are a bit puzzled by Europe. Many of the fundamentals that we have discussed in our blogs, monthly and portfolio updates have been pointing to favorable market conditions for equities and a lid on rates thanks to ECB policy. But the charts – oh the charts. If we take currency out of the equation the market’s performance has been, to be kind, lackluster. Our question – what is holding it back?
Even though we discuss it a lot, we do not generally find politics to have a lot of explanatory power over the direction and volatility of the market over a reasonable holding period. But, it can create moments of uncertainty that can weigh down markets in the near term. We have written about France, Spain and the UK in previous discussions about Europe, the common theme being forces that could change the political stance of each country and therefore how they deal with greater Europe.
Tomorrow Italians go to the polls in an attempt to sort out la tragica commedia that has been their government for the last several years. It is a quintessentially Italian event with the candidacy of a disgraced and convicted former leader, businessman and notorious party hound Silvio Berlusconi (who is not even technically permitted under the terms of his banishment to hold office until 2019) and a serious contest from the party (5 Star) founded by comedian Beppe Grillo. As in France and other recent contests, there is a serious contestant in a far-right candidate invoking sentiments that evince the dark days of Benito Mussolini.
Italy is of no small consequence as a member of the EU and the global markets with Europe’s third largest economy and being an enormous issuer of debt. During the PIIGS crisis Italy imploding would have been the brick that took the whole wall down. Veering toward isolationism or even flirting with more anti-democratic sentiments now in response to North African migration and other pressures could destabilize the regional economy, threaten the liquidity of the banking system, and challenge what has been up to present a strengthening Euro. Even less extreme outcomes like a continuing inability to assemble a coalition government means that Europe is bookended in the North with Germany and Italy in the South with power vacuums from indistinct leadership while the UK, doing its best impression of King Edward VIII, abdicates its leadership position in the European community.
It is not the only explanation – there is rarely only one – for why a Europe full of promise is going sideways in market terms. But, it is something that must weigh to some degree on confidence in markets, debt and currency. There is not much to suggest we will get a lot of clarity out of this election based on the last several years in Italy. Perhaps the technocrat Macron can step into the breach, but a listless Europe with a weakened Merkel, ongoing chaos in Italy, secessionist fervor in Catalonia, and a departing Great Britain could, without strong leadership, fail to perform up to potential.