Italians will go to the polls on Sunday to vote on constitutional reforms that would centralize control under the national government. Yet few people will enter the polling booths with Italy's governance foremost in their mind.
For most, this is a referendum on the pro-market and social reforms of Prime Minister Matteo Renzi, and for others on Italy's membership of the European Union.
A 'No' vote will rattle confidence in Italy's economy and the euro, leading to a dip in Italian bank stocks as well as Italy focused cyclical stocks. Yet it could also provide an entrance point for an investment in export oriented companies from Ferrari (RACE) to Prada (PRDSY) , according to analysts who suggest that much of the negatives from a rejection of the reforms appear priced in."With real income growth languishing, public debt at historical highs, and domestic banks needing to raise more capital, a political setback would come at an unfortunate time, with potential negative repercussions for sovereign risk," Goldman Sachs noted earlier this week. "This is what the market has been increasingly pricing, particularly as the polling has swung in favour of a 'Vote No' victory."
Polls taken ahead of a 'black out period' that began on Nov. 18 suggest the changes will be rejected by a slim margin, though about a quarter of those polled said they were still undecided.
Italy's stock markets have already paid for the uncertainty of the vote. The MSCI Italy index has lagged the wider MSCI Europe by about 20% this year. Yields on Italy's 10 year government bonds have risen in recent weeks and are now trading at about 190 basis points above German 10 year bunds. That appears to be an overshoot, according to Goldman Sachs, which has suggested that a long term spread of about 160 basis points will eventually prevail, meaning that the "risk-reward (in the bond market) favors positioning long Italy."
There is still danger for the markets, notably in terms of the political uncertainty a no vote will usher in, even though Renzi has rowed back on a promise to resign if his reforms are defeated.
A 'Yes' victory Sunday would validate Renzi's reforms and reinforce his ability to push his program through. A 'No' victory could trigger various outcomes that range from Renzi staying on pursuing his reform program regardless to early elections that potentially opening the door to Italy's populist and anti-EU Five Star Movement.
A 'No' vote is universally expected to weigh on Italian banks and Italy-exposed cyclical stocks, however, and investors are taking the possibility that it will slow and potentially wind back banking reforms, including measures to hand the system's €360 billion ($381 billion0) in bad loans, seriously.
Italy's biggest lender Unicredit (UNCFF) has fallen 15.2% in the past month, its closest rival Intesa Sanpaolo (ISNPY) is down 5.5% over the same period, while No.3 Monte dei Paschi di Siena (BMDPY) is down 24%, despite climbing 6% on Tuesday after it launched a €4.3 billion ($4.6 billion) debt-for-equity swap Monday.
Highly leveraged but defensive Italian stocks, such as Enel and Telecom Italia, could also suffer due to their exposure to Italian government debt yields.
On the flip side, a wider sell off in the Italian markets might present a buying opportunity for Italian companies that make the bulk of their sales outside of their home nation.
Amongst the top tips of France's Exane BNP's are Ferrari, which sells just 8% of its cars in Italy, cement maker Buzzi Unicem (BZZUF) , 14% of sales in Italy, clothes maker Prada, 13% of sales in Italy and eye glasses maker Luxottica (LUXGF) , with just 4% of sale in Italy.