Italian voters are expected to reject constitutional reforms in a referendum on Sunday, as worries grew that a “no” vote could spark a political crisis and a selloff in Italy’s stock market.
But instead of running for the hills, investors should stay grounded and snatch up any beaten-down Italian shares, says J.P. Morgan’s chief European equity strategist Mislav Matejka.
“There could be a knee-jerk 2-4% market weakness on Monday if there is a ‘no’ outcome. But unlike following the U.S. election and Brexit, this will not be a big surprise, as the polls were consistently in a ‘no’ camp. Investors have already reduced exposure to Italy significantly,” he told MarketWatch.
Italy’s FTSE MIB index I945, -0.07% has lost more than 20% this year, with banks bearing the brunt of the selloff. The FTSE Italia All-Share Banks Sector IndexIT8300, -0.64% has lost 48%, making it one of the worst performing indexes in Europe this year. But the country’s stocks, and particularly those in lenders, are now so cheap that any further slump would be unwarranted, Matejka said.
“So we think if there is any knee-jerk weakness, it’s great buying opportunity. We would buy into it, because at the end the day contagion would be contained by the ECB,” he said.
The referendum on Sunday is on proposed constitutional reforms, but is generally seen in Italy as a vote of confidence in Prime Minister Matteo Renzi. If Italian voters reject the proposals — and polls point toward this outcome — analysts fear it would lead to Renzi’s resignation and the dissolution of Italy’s government.
Another concern is that a large protest vote could give the populist and anti-EU Five Star movement enough momentum to put Italy on a path to leave the eurozone.
Holger Schmieding, chief economist at Berenberg, said earlier this week that the “Italian problems could theoretically spark a systemic crisis in the eurozone.”