The market is too negative on Italy as the worries that surround the country and the fears of the upcoming constitutional referendum are exaggerated.
In an investment update Citywire + rated Karnaus highlighted his Italian positions, and what a Yes or No Vote would mean for the Italian economy.
‘We are overweight Italian bonds and in particular, we like the Italian banking sector.'
'We have exposure to well-run Italian banks such as Intesa and Unicredit and consider the recent underperformance as unjustified and thus an opportune entry opportunity.’
Citywire A-rated Mondher Bettaieb, head of corporate bonds at the firm, said if Matteo Renzi loses the referendum by a small margin it’s likely that President Sergio Mattarella will ask him to stay on for a period of stability.
'Renzi has a majority in the lower house and some legitimacy, with many democrats and centre-right allies likely to support him even if they were to vote “No” in the referendum.'
The fund manager of the Vontobel Fund - EUR Corporate Bond Mid Yield added that Renzi appears to be the only one to be able to push through necessary reforms in the country, which strengthens his case for staying.
'The markets are well aware of the importance of the referendum and polls actually point toward a loss for Renzi. Therefore, I think there might actually be room for a positive surprise.'
Karnaus said in the event of a No Vote, a sell-off should be limited and could prove short-lived as he believes the upcoming ECB meeting will announce countermeasures.
‘If there is a No Vote, negative performance of Italian assets should be limited, we still see this as the most likely result.’
Karnaus said President Mattarella would have to choose between a new technocratic government or a government headed by possible candidates Pier Carlo Padoan or Carlo Calenda, which could mean further turbulence for the political environment.
‘Both of these options could mean more political instability and slow the healing process of the Italian banking sector as outside investors might shy away.’
‘Any possible sell-off should be confined, the ECB meets the Thursday (8 December) after the referendum and any strong negative market moves in Italian government bonds and periphery, in general, will likely be met by countermeasures from the ECB.’
Karnaus said Renzi’s departure could set off a political crisis but believes current fears are somewhat overdone.
'Doubts about the state of the Italian financial sector are rife and the last thing investors want is an injection of political instability. In our view, the current fears are somewhat overdone.'
Despite these fears, Karnaus said if a Yes Vote happens, investors should expect a strong performance of Italian assets.
‘Fixed-income markets have largely priced in a No Vote and a Yes Vote would be a strong surprise, however how exactly Mr. Renzi will actually use his increased mandate to implement new reforms is yet to be seen.’
‘Just yesterday, there was an unconfirmed news report that Mr. Renzi could offer his resignation even in the case of a Yes vote. He would then seek re-appointment in the hopes of forming a new government with a broader majority.’
The Vontobel Fund Eastern European Bond fund returned 0.93% in EUR terms over the three years to the end of October 2016. This compares with a 0.09% rise by its Citywire-assigned benchmark, the BofA Merrill Lynch Eastern European Govt TR EUR, over the same time period.
Elsewhere the Vontobel Fund Euro Bond Fund returned 16.30% in EUR terms over the three years to the end of October 2016. This compares with a 19.73% rise by its Citywire-assigned benchmark the JP Morgan EMU IG Government TR, over the same time period.