A rise in populism for the embattled nation of Italy won't be enough to unsettle investors this year, with analysts at Citi predicting markets in Milan to finish off 2018 on a strong note.
Highlighting two previous periods of weakness for Italian stocks, back in 2011 and 2014, Citi analysts said Tuesday: "We see it increasingly likely that history could repeat itself in (the fourth quarter of 2018)."
The main Italian index — the FTSE MIB — is down by almost 7 percent since the start of the year despite being a top pick for many investors back in January. Investors have taken a cautious approach following fears that the new populist government will increase public spending when the country is already mired in large amounts of public debt. The government — a coalition between the leftist Five Star Movement and the right-wing Lega — is currently preparing its budget for 2019.
In the research note Tuesday, the analysts, including Citi's Tina Fordham, said the Italian index had initially outperformed the European benchmark by 12 percent earlier this year and reached a new 10-year high "despite the lack of a clear election outcome" at the March vote.
"Then the worsening of the political situation caused a substantial correction that cancelled all the gains," the bank said. Citi didn't give a predicted figure for a year-end rally but noted previous turbulence in 2016 where the FTSEMIB fell 29 percent before rallying and closing the year up 27 percent.
According to Citi, Italy will announce a budget that will not have a deficit higher than 2 percent of gross domestic product. This would mean that Italy would not disrespect European rules and the reduction in government debt would continue, though at a slower pace. Italian stocks would likely benefit in such a scenario.