Goldman Sachs is turning sour on Italy as the populists take control

Italy. Joe Raedle / Getty Images

  • Goldman Sachs removes Italy’s state-owned energy company, Enel, from list of favourite stocks.
  • The move comes ahead of the agreement of a new government led by the populist Five Star Movement and the Lega Nord.
  • Both parties are committed to using more renewable sources of energy, which poses a threat to Enel’s profitability.
  • It could also be a sign of Goldman souring on Italy more generally.

Goldman Sachs has removed one of Italy’s most prominent companies from a list of recommended stocks, as a direct consequence of the incoming populist government.

Italy has been without a government for more than two months since an inconclusive election in March but is the Five Star Movement and the Lega Nord have now agreed on the principal terms of a ruling coalition.

The coalition has Goldman worried about Enel, Italy’s state-controlled utility company. Both Five Star and Lega Nord are committed to using more renewable energy while in government, something that is likely to hurt Enel as it would likely end up lowering energy prices and impacting the company’s profitability.

“The plans presented by M5S/Lega could be deflationary in our view as it would lower power bills by around 15 per cent, we estimate,” Goldman’s team of US-based analysts wrote.

Goldman pulled Enel from its “conviction list,” which charts its most favoured stocks. Still, despite removing Enel from that list, it still holds a “buy” recommendation on the stock.

Five Star – which will be the senior partner in the government – is particularly keen on the usage of renewable energy sources to generate Italy’s power and is strongly environmentalist. Five Star’s name is based on the five flagship issues it cares about, and four of those – publicly owned water, sustainable (eco-friendly) transport, sustainable development, and environmentalism – are related to the environment.

While Goldman’s change of recommendation on Enel seemingly only reflects fundamental issues around how certain policies will impact the company, it could also be seen as a broader sign that Italy will be a less attractive place to invest under a Five Star and Lega Nord coalition.