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Never mind Brexit, Italy is next year's big risk for markets

Never mind Brexit, Italy is next year's big risk for markets

Mounting tensions between Italy and the European Union present one of the biggest risks to stock markets next year, according to James Bateman, manager of the Fidelity Wealthbuilder fund.

‘Italy is a far bigger risk in terms of a market event than Brexit and it's a much bigger risk because it's a risk the market's not focused on pricing it in,’ said Bateman, chief investment officer for multi-asset at the fund group.

Italy has clashed with the European Commission over its budgetary plans to increase its debt to 2.4% of gross domestic product, with the country’s populist coalition government refusing to bow to pressure to lower public spending.

While the spat sparked a sell-off in Italian government debt and sent shares in Italian banks tumbling in September, its impact on global stock markets has been muted. That could change next year, warned Bateman.

‘It is not a question of will Italy leave the EU - we are years off that being a relevant debate probably,' he said.

'But it is question of will the market start worrying that the remaining EU countries are not as solid a bloc as they thought they were.’

Bateman (pictured) also flagged Germany's looming change of leadership as a potential hurdle for markets next year, after Angela Merkel announced in October she was stepping down as leader of the Christian Democratic Union and would not seek re-election as German chancellor in 2021.

CDU members will vote on her successor at a party conference kicking off on Friday. Merkel ally Annegret Kramp-Harrenbauer, conservative Jens Spahn and right-wing Freidrich Merz are the frontrunners.

‘One of them taking a tougher line on the EU is a likely outcome,' said Bateman.

‘Is that going to shift German policy even if they became chancellor? No, I don’t think it really would. Do I think it could worry markets? Yes, I do.

‘So if you're looking for another reason markets might get rattled that isn't Brexit that's Europe related, it is German succession.’

Fidelity global economist Anna Stupnytska shared similar concerns about Europe.

She said a global recession was unlikely in 2019 but added that a euro area crisis was one of two potential catalysts, the other being a misstep in Chinese economic policy.

‘So we see Italy wanting to exit. It's easy to imagine scenarios that could lead to a significant euro area crisis,’ said Stupnytska.

‘This is the kind of shock that can spill over and can also affect the US.

'When you talk to US economists, they say the US is fine because nothing can really happen globally to affect the state of the economy. I don’t think that's true - China and the euro area are big tail risks.’ 

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