The number one macro threat to European financial markets is political risk, according to Sabina Kalyan, global chief economist and head of EMEA strategy and research at CBRE.
“We’re definitely considering political risk as much as macro risk, which is quite unusual,” she said. The Italian constitutional referendum, being one of the EU's three pillar countries, is one of the main risks. "It doesn't mean we don't invest in those markets, it just means we're more conservative about which assets we use."
There are two options, in Kaylan’s view; that Renzi gets his referendum result which is fantastic because it means he can reform the makeup of the Senate, then hypothetically it should be easier for him to pass reforming legislation, supply side reform, similar to Spain where they are liberalising labour markets, pension markets, and laying the economic and legislative foundations through a period of resurgence.
“That’s option number one,” she said. “Option number two is that he loses the referendum and he has previously said he would resign if that were the case. But as the polls have become closer he has now said that he won’t resign.”
She deems the alternative to Renzi, the Five Star Alliance, not to be necessarily anti-reform, but essentially “not necessarily pro the investment environment or the flow of capital,” as well as having “an interesting stance towards the EU as an institution.”
Meanwhile, on the UK turf, she said the main damage of the leave vote is that it is questioning the EU project, but if anything it has rather unified Europe more, according to the chief economist, as there were strong reactions from Europe in the wake of the vote and thatthe UK has held up further integration.
“Sometimes you need an event to further galvanise the EU on its way to integration, and I suspect that is actually what is going to happen,” explained Kalyan. “But the financial community has not proven itself brilliant at predicting political direction, has it?”
In Kalyan's view, the evidence of what happened in financial markets the day after Brexit proved that the financial community had not adequately put the right probability on Brexit and have now come to terms with it.
"What is going to be really fascinating now is that when you go into events like the Italian referendum or the German and the French elections, you should probably see a bit more volatility in financial markets in the run up to those as people react to polling and take that more seriously than perhaps they did pre-Brexit," she said.
Kalyan noted that the leave vote was an event that helped to shape investors complacency surrounding political risk, not only in Europe but also making them assess the US election in a different light, which is positive.
Amid all the dark clouds with regards to political uncertainty, Kalyan emphasised that the good news coming out of Europe are not getting enough attention and that the consumer sector is actually doing well under the surface.
“All the negativity, all the distress, which is causing the ECB to keep things very loose, is prompting some pretty decent numbers when you look under the surface; retail spending, consumer confidence, issuance of new mortgages, credit going out… you can see the European consumer after years of worrying about unemployment and what on earth is going on, is slowly slowly starting to get back on their feet,” she said.