Exchange traded funds tracking Spanish and Italian equities have suffered significant falls over the past week as a result of events that threaten the political stability in both countries, and in the case of Italy raise fresh concerns over the rise of populism in Europe as a whole.
In Italy, the promise of a stable new government following the election has been thwarted once again, as the country’s president Sergio Mattarella rejected the finance minister chosen by the proposed coalition government – euro-sceptic Paolo Savona, whose appointment could have meant Italy exiting the single currency.
In response, the two populist parties seeking to form the coalition – the anti-establishment Five Star Movement and the right-wing Lega party – have called for the impeachment of president Mattarella. In an attempt to restore order, Carlo Cottarelli has been appointment interim prime minister, but the turmoil could mean another election as early as this autumn or at the start of next year, shrouding the country in continued uncertainty.
Meanwhile, Spain has voted in a new prime minister, leader of the Socialist party Pedro Sánchez, after conservative PM Mariano Rajoy was removed from office following a corruption scandal that engulfed his party. Rajoy was ousted following a no-confidence vote, after news emerged of a secret campaign fund used by his People’s Party from 1999 to 2005.
ETFs take the hit
Spanish and Italian stock markets were hit last week as a result of the unsettled political situation, with both Spain’s Ibex 35 index and Italy’s FTSE MIB sliding around 3.4% over the week to the close of Thursday 31 March, though both indices enjoyed a rebound on Friday, as some confidence returned following news of partial stability in both countries.
But over the month of May, the turmoil has sent ETFs tracking Spanish and Italian equity markets into the red, as they suffered significant falls during the last tumultuous week of the month.
TrackInsight data shows Spanish Stocks ETFs are down some 5% over the month of May, taking year to date performance also firmly into the red – down 4.9% since the start of 2018, after a brief rebound earlier in May. Flows over the month also indicate investor confidence has plunged, with a total of €112 million exiting Spanish ETFs in May (see chart below).
Meanwhile, Italian Stocks ETFs plunged 7% during May, but have just managed to remain in positive territory for the year to date with a return of 0.2%. Yet investors have been fleeing these funds in hordes, with €447 million leaving these ETFs over the month.
Concerns over European stability
The turmoil in Italy and Spain has negatively impacted Europe as a whole, as both countries are integral to the European Union. The threat of Italy leaving the euro is a particularly big concern, given it is the Eurozone’s third largest economy, and the potential for another election has left this possibility open, with support for the far right Lega party on the rise according to polls.
Meanwhile, according to Frankfurt-based research group Sentix, a gauge measuring the possibility of Italy leaving the single currency within the coming 12 months has risen from 3.6% in April to 11.3% in May.
Recent comments from EU and ECB officials also show that tensions are high, while billionaire George Soros has warned that the Eurozone is facing an “imminent existential crisis”, according to The Guardian.
All this has led to escalating outflows from European Stocks ETFs in May, reaching a total of €4.6 billion, although overall the sector is only down 0.6% over the period. Year to date outflows sit at €6.1 billion, with returns at a meagre 0.2%.