ROME - Geopolitical factors directly affect capital markets and, therefore, investor returns. This has been demonstrated recently at home here in Italy. The political upheaval underscores again the need for investors to think global.

 Indeed, the current situation in Italy has negatively influenced domestic equity and the government bond market, and the euro. But the market's reaction is probably overdone: investors in government debt will not be repaid in a devalued lira, and a rise in the annual budget deficit need not lead to fiscal calamity. Higher government spending is likely to boost GDP growth, and corporate profits, at least in the short term.

 Critics of the coalition's policies argue that a flat tax will lower government tax revenues, while a citizens’ income (basic income) and reducing the pension age that will increase expenditure, will lead to a bigger deficit. Bond investors certainly don’t like the budget implications of such policies. Oversupply of new debt is a risk. Further down the line, will Italy go the way of Greece and require a bailout from its EU partners? Furthermore, both parties are Eurosceptic, and holders of government bonds run the risk of Italy being pulled out of the euro and being repaid in a devalued lira. Hence the jump last week in spreads over bunds for Italian government bonds. The euro has also been affected, weakening on fears of an 'Italexit' at worst, or the country just seeking to leave the single currency.

 That said, Italy runs a 1.7 per cent budget surplus before interest payments are made. In addition, average maturity on the bunds debt is seven years, which is long by international standards and gives quite a bit of protection as not much rolls over to be refinanced in any one year. Also, much of the debt is held locally, by Italian banks and households. These are 'sticky' investors, unlikely to sell compared to U.S. hedge funds. And the popularity of the euro amongst household savers will probably deter the new government from trying to leave the euro.

 In the current political environment it is popular to criticise increasing government deficits as wasteful, while ignoring the important role they can play in boosting aggregate demand during times of weak private sector demand. Such policies, if accompanied by structural reform to the economy, can be useful. As such, considering the political uncertainty in Italy at present, it is imperative that investors focus on portfolio diversification and ‘go global’ in order to generate, maximise and secure their wealth. Three of the prime features of a sufficiently diversified portfolio are investing across geographical regions, industrial sector and asset class.  

 Investing across geographical regions is an essential part of a well-diversified portfolio, which allows investors to be best-placed to mitigate risk during times of market turbulence and make the most of the opportunities that arise. Savvy investors are aware that regularly reviewing their portfolio is fundamental in ensuring investments always remain on track and so that adjustments can be made if necessary when markets or personal circumstances change.

 Therefore, it’s crucial that investors keep a close eye on geopolitical factors such as the political crisis in Italy - that will shape markets and, as a result, impact their finances.

 Michael Jacobs is an International Wealth Manager and Team Manager at deVere Italia

 www.devere-Italia.it

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