Allez les bleus
After weeks of political tension, former PM Matteo Renzi withdrew his party’s support from Italy’s current governing coalition. This stoked further turmoil in the government as it struggles to agree on a way forward for post-covid economic recovery. We envision three possible outcomes: current PM Giuseppe Conte leads a new government, supported by the same majority or a slightly changed coalition; the formation of a new government led by a new PM; or, least likely, snap elections.
Elsewhere in European politics, in Germany, on Saturday delegates of the governing CDU party elected centrist Armin Laschet as party leader. This result should provide continuity on Merkel’s leadership given Laschet is both pro-Europe and in favour of fiscal spending, good news from a market perspective. The French government has spoken out against a surprising takeover bid from Canadian Couche-Tard for French hypermarket Carrefour. Claiming a threat to French food sovereignty, France’s finance minister referenced its investment control mechanism that would require state approval for acquisitions of companies deemed strategic. We think a pickup in M&A activity will be a key theme this year and favour event-driven hedge funds.
US banks, which have rebounded by a striking 50% since mid-October, have started to report Q4 results. Wells Fargo and Citigroup reported improved results but on low-quality metrics. Results from both banks came as a reality check in the wake of a strong Q4 rally. On the other hand, America’s biggest bank, JP Morgan Chase, reported stronger results. At the start of the earnings season it is crucial to judge profitability and cash-flow yield in the current low-rates environment. Last week the Federal Reserve committed to keeping interest rates low this year, which keeps us positive on global equities. These should be further reinforced by an economic rebound on the back of president-elect Biden’s fiscal spending plan. We do stress the importance of staying diversified however, especially after the Trump administration added more Chinese companies to its exclusion list for US investors, sending their share prices down.