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Why investors should keep a watchful eye on Italy in early 2017

Following a year packed with economic and political uncertainty, more risk factors are expected to unfold in 2017. For one strategist however, Brexit and Donald Trump's presidency isn't what concerns him the most at present, when looking at the year ahead.

"My eyes are focused on the 24th of January when the constitutional court in Italy will vote on whether the electoral law change that took place in 2015 is going to be held up," said Mike Bell, global market strategist at J.P. Morgan Asset Management, told CNBC on Tuesday.

In early December, the country's constitutional court announced that it would hold a hearing on its electoral law this coming January to examine its legitimacy. The electoral law — known as the "Italicum" — helps provide more parliamentary seats to a party who wins at least 40 percent of the popular vote.

At first, the Italicum law had been created to ensure greater political stability in Italy; however concerns are now rising that if this law is not changed, populist party Five Star Movement (5SM) could take advantage of the extra parliamentary seats. 5SM have previously indicated that it would renegotiate Italy's membership of the euro if it came into power.

"If (it's) not, and they change back to a system that's more proportional, then that reduces the risk of the Five Star Movement taking power whenever the Italian election eventually happens," Bell said.

"And that for me would remove one of the biggest risks for 2017 early on in the year, and therefore potentially brighten the outlook for European equities."


Former Prime Minister Matteo Renzi (R) and Italy's newly appointed Prime Minister Paolo Gentiloni pose during a swearing in ceremony at the Palazzo Chigi on December 12, 2016
VINCENZO PINTO | AFP | Getty Images
Former Prime Minister Matteo Renzi (R) and Italy's newly appointed Prime Minister Paolo Gentiloni pose during a swearing in ceremony at the Palazzo Chigi on December 12, 2016

Following the U.K.'s decision to leave the European Union back in June, questions have emerged over the future state of the political-economic bloc and its currency. The JP Morgan strategist said it is important that Italy doesn't end up having a referendum on the euro zone's currency, yet the court's decision could help ease fears of this.

"Italy is the one country in Europe where it's very close if you poll people as to whether or not they'd like to stay in the euro. So it's absolutely key that there isn't a referendum on the subject, otherwise it risks putting markets into turmoil."

"If this constitutional court ruling comes through, then it makes it pretty unlikely that you'll get a referendum on euro membership in Italy, and as I say that removes a big risk. Therefore, markets can start to focus what's really actually a pretty good improving fundamental story in Europe, where you could have earnings growing for the first time in nearly six years."

When looking outside of Europe, Bell said the risks coming into 2017 were most likely "skewed to the upside" with the better growth expected in the likes of the U.S.

"I think the Italian political risk is really the one risk out there that once that is passed, then I think markets can focus on really quite a good fundamental outlook of improving economic strength in the U.S. I think China will continue to grow at a relatively healthy rate, even though you may see a slight slowdown from the rate you've seen this year."

"Nevertheless, the main story will be that global growth picks up next year and if the politics in Europe doesn't flare up, then that should be a positive environment for risk assets."

—CNBC's Sam Meredith and Reuters contributed to this report.