At the time of writing, the FTSE 100 is up by around 20 points following Italy’s referendum result. However, the resignation of Italy’s prime minister is likely to cause a significant amount of uncertainty in the eurozone and in global stock markets. As such, share prices could fall and remain highly volatile over the coming weeks, which may make this an excellent buying opportunity.
An uncertain future
Since Italy is the third biggest economy within the Eurozone, its performance matters. While today’s result wasn’t a major surprise given recent polls, it means that the country’s future is highly uncertain. Confidence in Italy’s future is likely to move lower, since there’s a chance that a new PM and government could lead the country out of the eurozone.
At a time when the single currency is relatively weak and the EU’s future is somewhat uncertain following Brexit, this could lead to share price falls in the near term. When added to the potential for a less pro-EU president in France, elections in Germany and a general feeling that the eurozone is simply not working out in an economic sense, a fall in investor confidence seems likely.
Share price reaction
While the FTSE 100 has held up well in the hours following the referendum, the reality is that a fall is likely. Next year was already shaping up to be one of the most difficult for a number of years. A new, radical US president, Brexit, a slowdown in China and now further weakness for the EU and eurozone mean that the outlook for investors is downbeat.
In addition, global stock markets aren’t historically cheap at the present time. The S&P 500 is near its record high, while the FTSE 100 has held up well in recent months thanks in part to sterling’s weakness. It seems unlikely that such high valuations can be maintained if the future of the euro is now going to be called into question. After all, it’s one of the three most important regions of the world from an economic and political perspective alongside the US and China.
Investor reaction
One response of investors to this uncertainty could be to sell up and hold cash in order to weather the storm. However, the reality is that inflation is rising and interest rates in the UK are unlikely to increase for fear of choking off a recovery following the EU referendum. Therefore, a negative real-terms return on cash is on the cards.
As such, buying shares remains a good long-term play. Furthermore, if the FTSE 100 and other indices fall following the Italian referendum (which seems likely) then it could be possible to buy high quality stocks at discounted prices. In the short run, they may be exceptionally volatile and cause a degree of fear among their holders. However, in the long run they offer high returns, since history tells us that it’s during the most uncertain times that the best buys are generally made.
