Investors have responded with a shrug to the collapse of Italy's government. The spread between 10-year Italian bonds and their safer German counterparts has barely budged at around 200 basis points, well below a high of 325 basis points over the past 12 months.

The sanguine response may partly reflect confidence that Italy's disruptive dispute with the EU over budget rules has been resolved, at least for now. Meanwhile plenty of political risk is already priced into the market. Italian 10-year yields remain around 120 basis points higher than bonds of this duration from Spain and Portugal, other riskier Eurozone nations.

But other political risks are on the rise for Europe at a time when growth is fragile.

So, while the immediate contagion arising from Italy's situation has been modest, political risks for Europe remain elevated. Partly as a result, we are underweight Eurozone stocks versus the US. Meanwhile, Eurozone equities are priced for an overly optimistic macro scenario. We expect corporate earnings to be flat, at best, for 2019.