The vote, dubbed ‘Brexit,’ threw the markets for a loop and had wide implications for the British economy. Not to mention those stocks and business domiciled in the U.K. However, the biggest effects could be felt by the European Union itself, and are bigger than just one nation leaving the trade and monetary bloc.
That’s because more than one nation is considering a vote to leave the E.U.
In this case, we’re talking about Italy. Unlike the U.K., Italy has been on the other side of the coin. As a bailout recipient, the nation has been under duress, since imposed austerity measures have caused stagnation, chronic high unemployment and a banking crisis. Under that scenario, Prime Minister Matteo Renzi has called for a bailout referendum.
The vote isn’t about just straight leaving the E.U. Citizens can’t directly vote on intentional treaties in Italy. It is about constitutional reforms, and Renzi has pledged to step down, if the vote isn’t passed. Political analysts expect that will lead the way for the populist anti-establishment Five Star Movement and its leader Beppe Grillo to win Italy’s election. Grillo has already announced his first plans of action will be to remove Italy from the E.U. and become independent.
Analysts think that Renzi will lose and step down, leading the way for a so-called Italian exit or “Quitaly.” With the vote coming at the end of October, Italy could be the next domino in the European Union to fall.
If Italy Leaves
Like the U.K’s decision to leave the E.U., Italy’s pending vote isn’t exactly a net positive or negative either way. There are a lot of moving parts. Nonetheless, if Italy decides to vote “no” on Renzi’s referendums, and it does lead to a Brexit-style departure from the European Europe, it’s safe to say there will be negative effects right off the bat.
For one thing, stocks in the nation should tank – just like they initially did in U.K. According to investment bank HSBC, Italian stocks could fall by more than 20% when the vote takes place, Renzi would then resign and a political vacuum would take hold. HSBC estimates that the nation’s banking sector – which is already on the verge of collapse – could take a major hit, as could the real estate sector.
There could also be a huge collapse in the euro currency. Unlike the U.K., Italy is a member of the monetary union as well. That means that it uses the euro currency. By voting “no” and setting off a chain of events, we could be looking at a major decline in the euro. Here are 3 ETFs to play a “no” vote:
|Ticker||Name||Asset Class||Expense Ratio||Stance|
|(EWI )||iShares MSCI Italy Capped ETF||Equity||0.49%||This is the only direct play on Italian stocks available to investors.|
|(EUO )||ProShares UltraShort Euro||Currency||0.93%||This is a very liquid way for investors to go short the euro currency, while providing an extra boost do to leverage.|
|(EUFX )||ProShares Short Euro||Currency||0.95%||This is a very liquid way for investors to go short the euro currency without the hassle of using a forex account or using futures.|
For investors wanting to capitalize on a decline in Italian stocks, they can do it the old-fashioned way and short the iShares MSCI Italy Capped ETF (EWI ). EWI tracks the MSCI Italy 25-50, which is a measure of the 24 largest stocks in the nation. About 30% of its exposure is banks and other financial firms. Already, the ETF is down big this year, as concerns have grown. But EWI should fall further, if Italy goes through with “Quitaly.” That makes it an easy short for investors.
Shorting the euro currency is much easier with ETFs, since there are a few different routes investors can take. The ProShares UltraShort Euro (EUO ) provides the biggest bang for the buck. EUO provides 2x the inverse exposure to the daily movement of the euro. That means if the euro falls, EUO will go up. The leverage provides an extra boost, if that happens. The ProShares Short Euro (EUFX ) can be used by investors looking to short the currency without the leverage effect.
If Italy Stays
Obviously, if the vote goes Renzi’s way and is passed, the opposite could be in effect for Italy and its markets. At least in the short term. Austerity budgets, unemployment and general state of the economy could still persist if Renzi isn’t able to deliver on his plans. HSBC does expect a short-term relief rally of roughly 5% to 10% on a positive vote. Likewise, the European Union and euro currency would dodge a major bullet and continue to operate as normal. Here are 2 ETFs to play a “yes” vote.
|Ticker||Name||Asset Class||Expense Ratio||Stance|
|(EUSC )||WisdomTree Europe Hedged SmallCap Equity Fund||Equity||0.58%||This fund features a basket of European small-caps, but Italy is the largest weighting.|
|(FXE )||Guggenheim CurrencyShares Euro Trust||Currency||0.40%||This is a physical way for investors to own the euro currency without the hassle of using a forex account or using futures.|
Previously mentioned EWI would be a big winner for the relief rally, as would the WisdomTree Europe Hedged SmallCap Equity Fund (EUSC ). EUSC provides exposure to European small caps. The volatile nature of smaller firms already adds to their growth potential. What’s great about the ETF is that it has around 20% of its exposure to Italian small caps. Investors basically get a double shot in the arm – small caps and Italian exposure. Both should do very well, if the nation votes yes.
And let’s not forget the Euro. Guggenheim CurrencyShares Euro Trust (FXE ) is the classic way to play the currency. FXE owns physical euro notes stored in a bank on behalf of investors and one share represents an even $100 exchange. If the euro rises, it’ll be directly reflected in the value of FXE share price.
The Bottom Line
In the end, the Brexit opened up a can of worms. The first of those worms will be Italy. While not exactly voting to leave the European Union, the referendum vote could signal the ability of the anti-Europe government to take power – and that would lead to the so-called “Quitaly” scenario. In the end, investors do have the ability to play the vote, in either direction.
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