What do a comedian, outdated polling techniques and a much derided populist politician have in common? They all made a joke out of investors on Monday.
The buyside had snapped up Italian bonds in secondary trading on Monday morning — prompting an 11bp drop on 10 year BTPs by 1pm London time. And yields plunged a further 17bp after early exit polls suggested a win for the centre-left coalition in the Italian general election. All this, despite the notorious unreliability of Italian exit polls.
The result, in some quarters, is little short of despair — and not just from those from whom that reaction might be most justified, the ordinary people that will suffer as the country slides. Market participants — perhaps nursing the pain from having allowed their hopes to get the better of them — express disbelief that voters seem unable to pick the option that seems most sensible.
People simply do not want to hear about austerity, one Italian investment bank CEO tells EuroWeek. "They are happy to bargain the future of their children for their short term benefit."
Clown vs comedian
With no opinion polls allowed in the two weeks preceding the election, the late run of the capital markets’ bogeyman, former prime minister and media mogul Silvio Berlusconi, largely went under the pollsters' radar — and therefore that of many investors.
After later projections on Monday hinted at a strong Berlusconi showing and a hung parliament, Italian secondaries reversed their gains and finished down on the day. More pain followed on Tuesday.
Berlusconi was largely written off when he announced his return in December last year. But the old campaigner has managed a comeback more impressive than the one made by his hair a few years ago.
He steadily reduced the gap between his coalition and the centre-left and was still catching up when the pre-election polling ban came into place two weeks ago.
Without numbers on voters’ latest leanings to hand, it is remarkable that investors were so willing to buy up Italian paper on Monday morning, ahead of any official information. Even after the first exit polls showed a centre-left victory, investors should have been wary — those exit polls have been very wrong before.
Investors also seemed to be woefully ignorant of the appeal of anti-austerity, anti-establishment comedian Beppe Grillo. His party ended up with a quarter of the popular vote, despite the final pre-election polls placing his share at between 14.7%-18.8%.
Investors should reconsider how they second-guess election results.
It's the internet, stupid
Grillo boosted his popularity by being web-savvy, getting his message across using social media. Investors should not be surprised by this shift in campaign strategy — Barack Obama used a much lauded internet-based approach to win the US presidency in 2008.
The satirist has more than 700,000 Twitter followers, helping to attract more than 100,000 people at a time to some of his rallies across Italy. That alone should make him a serious contender, but his refusal to be interviewed by television or newspapers doubtless explains why many failed to take his chances serously.
He could now be a power broker or, if the centre-right and centre-left form a grand coalition, he could be the main opposition. Such a position is unlikely to harm his popularity.
The election is a sign of a changing political world. Luckily for pro-austerity European policymakers, the next general election in the eurozone periphery does not have to be called until October 2015, in Portugal.
But while politicians may have time to deal with the fallout of the Italy result, investors should be wary of getting their fingers burned again. They should listen less to arcane and unreliable polling methods and take more time studying fundamentals. At the very least, they should wait until they have some data before rushing in to buy.