Navigating Political Turbulence in Italy: Sectoral Risks and Opportunities for Eurozone Investors

The recent police raids targeting Italy's far-right group Last Legion—which uncovered weapons, extremist propaganda, and plans for political violence—mark a new chapter in Italy's ongoing struggle with far-right extremism. Yet this incident is but one thread in a broader tapestry of political instability engulfing the country. With elections looming, controversial laws threatening civil liberties, and a deeply divided political landscape, Italy's turmoil is now a key driver of uncertainty for Eurozone equities. For investors, the challenge lies in parsing the sectoral risks and opportunities emerging from this volatility.

Infrastructure: Betting on Meloni's Megaprojects—or Paying the Political Price?

Giorgia Meloni's Brothers of Italy (FdI) leads polls at 29-31%, positioning her as likely Prime Minister after the June 26 elections. Her flagship policy—a €15 billion “Sicily-Mainland Bridge” and other infrastructure projects—could benefit firms like Atlantia (ATL.MI) and Salini Impregilo (SALI.MI). These companies stand to gain from a government prioritizing “national strategic projects.”

However, Meloni's coalition stability is far from assured. A fractured parliament and tensions with Lega's Matteo Salvini over EU integration could delay projects. Investors should also weigh the risks: if coalition infighting disrupts budgets, infrastructure stocks could face a sharp correction.

Energy: The Green Deal Clash and Fossil Fuel Subsidies

Meloni's push to expand fossil fuel subsidies—a policy clashing with the EU's Green Deal—creates sectoral divergence. Traditional energy firms like Eni (ENI.MI) may benefit in the short term, but Brussels' withholding of recovery funds could stifle long-term gains. Meanwhile, renewable energy stocks like NextEra Energy Europe (NEE) or Ørsted (ORSTED.CO) remain vulnerable to regulatory uncertainty.

The EU's stance is clear: compliance with climate targets is non-negotiable. Investors in renewables should treat Italian exposure with caution unless Meloni's government pivots toward compromise.

Healthcare and Utilities: The Cost-Cutting Sword of Damocles

Meloni's proposed price controls and austerity measures threaten profit margins in healthcare and utilities. Firms like Pharmamar (PHM.MC) or Enel (ENE.MI) face pressure from government spending cuts.

The risk here is twofold: direct margin compression and indirect reputational damage if public backlash over austerity spills into consumer sentiment. Investors may want to prioritize sectors with pricing power or international revenue streams to hedge against domestic headwinds.

Geopolitical Risks: Meloni's Foreign Policy and Defense Spending

Meloni's alignment with Viktor Orbán and Donald Trump raises concerns about Italy's commitment to Western alliances. Her proposed defense spending hikes—part of Europe's “ReArm” initiative—could boost firms like Leonardo (LDO.MI), a major defense contractor.

However, geopolitical unpredictability could disrupt supply chains and trade relationships. Investors in defense stocks should monitor EU-Italy relations closely; a breakdown in trust over fiscal or migration policies could derail contracts.

The Bottom Line: Play Defense, but Look for Contrarian Plays

Italy's political turmoil is far from over. The Decree-law 48/2025—criminalizing peaceful protests—has already sparked mass demonstrations, while the EU Court of Justice has ruled against Italy's restrictive migration policies. These dynamics create a high-risk environment for equity investors.

Investment Recommendations:
1. Avoid Utilities and Healthcare: Until austerity measures are clarified, these sectors face profit headwinds.
2. Be Selective in Infrastructure: Focus on firms with diversified revenue streams or projects already in advanced stages (e.g., Salini Impregilo's overseas pipelines).
3. Short-Term Plays on Defense: Leonardo could benefit from defense spending, but pair exposure with EU policy risk hedging.
4. Watch the Sovereign Debt Spread: A widening gap between Italian BTPs and German Bunds (tracked via BTP-Bund spreads) signals rising political risk—a sell signal for cyclical equities.

The Eurozone's broader resilience—driven by Germany's fiscal stimulus and ECB rate cuts—offers a floor. But Italy's instability remains a wildcard. For now, investors should prioritize flexibility, liquidity, and geopolitical hedging to navigate this volatile landscape.

In the end, Italy's political reckoning is a test of investors' patience—and their ability to distinguish fleeting headlines from structural shifts.