Cutting through the noise: The Italian Referendum as case study in bias

With the YES and NO campaigns now in full swing in Italy, polls are currently inconclusive in their predictions of what the Referendum result will be.


However, this uncertainty has not prevented commentators (many of whom had not foreseen Brexit, the rise of Trump or a range of other recent developments) to try to impose a narrative on what the vote is really about.

Many, particularly those outside of Italy, are keen to define the referendum as a protest vote. There is some evidence for this. One poll suggests that the majority of those planning to vote against reform are doing so as a vote against the government, while another suggests that a large proportion of voters don’t understand the complexities of the proposals themselves.


Others are keen to push this even further. Similarities are being drawn from the recent experience of Brexit, the rise of Donald Trump and other recent phenomena. Because it conforms to a pre-existing narrative, people are keen to see the referendum as a ‘vote on globalisation’.

“The Italian Referendum Could Result in the Death of the Euro”, titled Forbes in a recent article. International commentators are somewhat hyperbolic in their prediction of the implications of the referendum result and many suggest that a ‘No’ vote might lead to an Italexit from the Eurozone.

Such a prediction overlooks the reality that so many things would have to go a certain way for this to happen. It would happen: if Italy voted against constitutional reform; if Renzi subsequently resigned; if an election was called as a result of this; if the Movimento Cinque Stelle won this election; if  they held a referendum on the Eurozone; if Italy voted to leave. Further, the difficulty of Italexit is incomparable to that of Brexit due to Italy’s involvement in the single currency. It also appears to run against voters’ actual views on EU membership.


Extrapolating from Brexit the potential outcome of the Italian referendum is a good example of availability bias (predicting that something is likely to happen just because a similar event, often from the recent past, comes to mind easily), and might lead to the wrong conclusions. Whilst Brexit does indeed underscore the fact that austerity has fostered an anti-establishment atmosphere worldwide, it is quite different to the Italian Referendum.

Not only are Britain and Italy two culturally distinct countries, these referenda are about incomparable changes to their political systems.

Overall, outsiders seem to think that a rejection of constitutional reform would risk new, unprecedented levels of political instability. But Italy has had 63 governments and 27 prime ministers in the past 70 years, and a rejection of the proposed reforms would just mean its politics would continue down that same unstable path. A slimmer and more centralised political system could potentially support future growth, but history tells us politics and the economy don’t always go hand in hand.


Political instability being the norm, many Italians regard this simply as a vote on the unelected Renzi – for them it does not have the inflated significance of Brexit, trade, or saving the banks that the international press is trying to attribute to it.

The referendum’s impact on asset prices

So far, it is hard to discern the extent to which the referendum is impacting asset prices because there are other dynamics at play. Italian government bonds have underperformed their Spanish counterparts, but only modestly and largely due to Spanish outperformance. For the most part, both of these bonds have mirrored the behaviour of other global government bonds.


The Italian equity markets have also underperformed Spain, but the impact of the Italian banking sector’s specific problems are significant here, as is Spain’s exposure to the economies of South America, which have benefited from improving fundamentals of late.



Looking ahead, the different perspectives on the Italian referendum might cause short-term market volatility in the wake of the result in early December. If Italy votes ‘Yes’, the range of outcomes seems too broad for us to know how such a decision would affect economic fundamentals as yet. However, if Italy votes against constitutional reform, such volatility might provide investment opportunities if investors interpret the vote through the ‘Brexit lens.’

We are unconvinced that the long-term implications of such a decision would be as extreme as current commentary suggests. From an investment standpoint, the reality is that despite the sticky situation with Italian banks, the economic environment is slowly improving and valuations are attractive.

Our stance is, as ever, to avoid trying to predict the outcome of this event and to evaluate the market’s attitude towards what remains one of the cheapest stock markets in the world. If some of this cheapness is a result of skewed interpretations of the implications of the referendum, and should this increase nearer the vote itself, then it could offer an opportunity for investors.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.