LONDON (Reuters) - Franklin Templeton’s David Zahn said on Monday that he would look for more certainty on the make-up of the next Italian government before reassessing his underweight position on Italian bonds.
Italy faces a prolonged period of political instability after voters delivered a hung parliament in Sunday’s election, spurning traditional parties and flocking to anti-establishment and far-right groups in record numbers.
“We are underweight Italy at the moment and anticipated there would be some volatility,” Zahn told Reuters. “We would look for some more certainty before we consider any changes.”
Zahn is Franklin Templeton’s head of European fixed income and manages more than 2 billion euros ($2.4 billion) of assets.
He said the weighting of Italian bonds held in the flagship Franklin European Total Return Fund was 7.50 percent compared to its benchmark, the Bloomberg Barclays Euro Aggregate Index which had a 15.60 percent weighting for Italian bonds.
Zahn added that he remained optimistic about the economic “fundamentals” in Italy, the euro zone’s third biggest economy.
But he said he was worried about the fiscal policies of the next government.
“The main concern for me is what coalition comes out of this election,” Zahn said.
“The one thing that is clear to me is that the establishment are not well liked by the population and therefore I expect spending to be increased. Given Italy’s fiscal dynamics, this is concerning.”
At 132 percent of GDP, Italy has the European Union’s worst debt ratio after Greece.
Italian government bond yields rose sharply on Monday in the wake of the election results, with investors positioning for a period of political instability.
Italy’s 10-year bond yield was trading at 2.09 percent, up 5 basis points on the day.
Reporting by Dhara Ranasinghe, Editing by Abhinav Ramnarayan and Toby Chopra