Concern about Italy’s fiscal condition and the risks of a populist upsurge in Italian politics widened the spread between Italian and German 10-year government bonds to just over 2 percentage points earlier this week, but the spread narrowed by 10 basis points to 1.9% in this morning’s trading after the prospect of early elections faded.

But Antonio Guglielmi, the head of equities at Mediobanca, expects the spread to narrow to +180 bps in the short-term and further as Italian politics converges on a reform course similar to France under Emmanuel Macron.

In a recent note to clients. Guglielmi wrote:

“The investment case on Italy that we are sharing with investors is based on three pillars:

  1. Macro: internal devaluation is starting to bear fruit – current account record highs suggest room for exceeding 0.8% consensus GDP growth this year;
  2. Exit: Italexit risk is collapsing, not only based on the colder tone we sense in Rome from the perceived ‘anti-establishment’ parties, but also in light of mutualisation progress expected after the German elections in September;
  3. Italian politics: we think the market overreacted to the warning of the September / October elections. Not only do we maintain our contrarian view on elections expected in Q2 2018, but we think there is enough for another ‘look through’ electoral outcome ending up in a market-friendly way.”