• In case of a preliminary agreement between M5S and the League, it is worth noting that despite their electoral rhetoric, the Italian institutional and constitutional framework imposes on any new government to respect three pillars: the Euro, the Eurozone and Nato. Any explicit deviation from these international agreements would likely prompt the President of the Republic to alt any further step of government formation and would push for a “neutral” government or, if not voted in Parliament, for a snap election.

• On the economic front, like for the Eurozone, we expect the Italian growth to have peaked and moderate its pace into this year and the next, albeit remaining above potential. The sentiment deterioration and the moderation of growth so far are still in line with our outlook and not too concerning, but a protracted political uncertainty could weigh on domestic drivers.

• On Italian equities, main market drivers will be the recovery of financial and energy sector. We prefer the small and mid-cap segments, with idiosyncratic stories less exposed to political risk.

• On Euro fixed income, at the current level of spreads and allowing for some short-term volatility, we think most of the political risk related to a populist government is priced in. However, because of this event, the higher risk premium will likely remain. We reiterate that high flexibility applied to portfolio management is necessary in order to benefit from the expected volatility that will undoubtedly arise as the ECB tapering phase approaches.

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