01.06.18

Snapshots is trying to chillax and digest the political and market volatility of this week. Interestingly, chillax is now an official word in the Oxford English Dictionary and as of January 2018, so is the favourite word in the Snapshots household – hangry.

Ciao Conte

The word ’fangry’ has not made it in yet but it would be a suitable description for the rhetoric from the populist coalition government in Italy when they were denied their first choice of Eurosceptic Finance Minister. Nevertheless they have succeeded in forming a government.

The clearest strategy from the new government is anti-immigration and very loose fiscal policy through reduced taxes and a universal basic income. The proposed fiscal plan is estimated to cost Italy €90-100bn a year. For context, Trump’s tax plan is estimated to cost $150bn a year. The US economy is ten times bigger than Italy as measured by GDP. This is clearly unaffordable for Italy.

The good news is the new government only has a slim majority in the senate. The bad news is Berlusconi, who has a large portion of the swing seats, is in favour of the tax cuts which make up €50bn of that annual cost. This is why the rating agencies have put Italy and its banks on review for downgrade and this is also the reason we remain cautious on Italian risk across our portfolios.

Adios Rajoy

Almost at the same time Spain’s Rajoy has been ousted in a no-confidence vote. He is replaced by a socialist, Sanchez, and new elections are expected in 12 months. Sanchez’s fiscal plans are unclear but if they follow the current global zeitgeist, they will also be for looser fiscal policies.

These looser fiscal policies are coming at a time when monetary policy is slowly tightening. The obvious implication is crowding out of private debt versus public debt.  We can therefore continue to expect higher levels of volatility.

Good luck.

Asif Godall
Co-Chief Investment Officer