The fixation on Brexit means that it is not the biggest threat to markets that investors need to worry most about.
Brexit uncertainty is near the top of investors' worry lists, alongside trade wars and quantitative easing going into reverse.
But, according to James Bateman, chief investment officer for multi asset at Fidelity International, while Brexit is dominating the headlines there are two other big risks to worry about that are not receiving much in the way of column inches.
“There is a fixation on Brexit. But if everyone is fixated on Brexit, it is not the risk to worry about,” he points out.
Speaking at Fidelity’s Multi Asset Outlook for 2019, Bateman noted that when it comes to Brexit, markets have already considered the various outcomes that may play out as the UK attempts to leave the EU. He notes: “Markets have already envisioned the various ways it will go.”
This sentiment has been echoed by other financial commentators, with many noting that the even in the case of the worst outcome – a “no deal” Brexit – is already priced into UK markets, meaning the market response to such a scenario may be more muted than feared, at least in terms of short term volatility.
With this in mind, Bateman notes the biggest market moving risk facing Europe is Italy and its confrontation with the European Union over its budget.
Italy is currently locked in a dispute with EU officials in Brussels over its spending plans. Brussels claims that Italy’s budget is fiscally irresponsible based the country’s growth figures. The Italian government disputes this and is using EU opposition as an example of Brussel’s attempt to curtail Italy’s sovereignty. While the prospects of Italy pushing to leave the Eurozone remains low, the confrontation and any escalation of it raises disturbing questions about the future of the single currency.
“Italy is a far bigger risk to markets,” Bateman notes. He points out that as of yet the full potential of Italy’s clash with Brussels has not been fully focused on by investors. “The market has thought through every Brexit risk, not so with Italy,” he said.
At the same time, says Bateman, markets may soon find themselves being swayed by German politics, as the country prepares for chancellor Angela Merkel to step down as head of the Christian Democrats in 2021.
As is not usually the case in German politics, there is no clear successor to Merkel yet. Instead, there are a handful of candidates now vying for position. This, says Bateman, means we will see a period of potential candidates ramping up and taking bold positions in a bid to differentiate themselves from rival candidates. Principally, “they could take a tougher stance on the EU,” says Bateman. “Do I think this could sway markets? Yes I do."
A Jeremy Corbyn/John McDonnell government is by far the greatest risk to the UK economy and stock market than anything else happening in europe or Brexit.