Italy’s government has been in a state of limbo for the past three months, following an inconclusive election result in March: forming a coalition between the anti-establishment Five Star Movement and the nationalist League Party has proved to be a challenge.

Things were looking up early last week. That was, until President Mattarella threw a spanner in the works and vetoed the choice of finance minister, sparking outrage from both camps and effectively bringing proceedings to a halt. With the need for another election a possibility, and some commentators questioning whether Italy would eventually follow the UK’s lead and exit the European Union, markets reacted to the uncertainty. Italian stock prices - which had been outperforming most of their European peers for the last year or so – fell, causing other markets to follow suit, and the country’s government bond yields spiked above 3% at one point.

However, by the end of the week, politicians had returned to the negotiating table, a prime minister and finance minister were agreed and the new government was sworn in. Calm was, at least temporarily, restored.

While there are still problems to be solved in the country, Andrea Ianello, investment director at Fidelity International, said that economic conditions in Italy are heading in the right direction.

“Economic growth has been more positive since 2013, the current account deficit has been in surplus for five years, and the fiscal deficit has more than halved since its 2009 peak,” he explained.

“Corporate fundamentals have improved considerably in the past year, and the national champions among Italian banks have worked hard to improve their capital position.”

Time to take advantage of the market fall?

Our view at Chelsea is that Italy is unlikely to leave the EU. For starters, a referendum isn't currently allowed under the constitution and, even if it was, there is the added complication of changing currency once again from the euro to the lira. Having seen what happened to sterling after the Brexit vote, even the most hardy euro-sceptics are likely to pause for thought.

Stock markets have already made back many of their losses and Italy’s bonds are still selling: €5.6bn government bonds were auctioned amidst all the turmoil, which shows there is still demand from overseas investors for the asset class, especially at attractive levels.

We remain positive on European equities, which still offer good value, and topped up our holdings in the VT Chelsea Managed funds when markets fell last week.

There are several attractive options on our Chelsea Selection list for investors wishing to do the same. For instance, BlackRock Continental European Income, which is headed up by Andreas Zoellinger, looks to provide steady growth and low-risk cash returns, as well as a sustainable and rising stream of income. The manager also chooses holdings on a stock-by-stock basis, meaning he can look beyond the politics to find attractive opportunities. The fund has just under 12% allocated to Italian companies.

Marborough European Multi-Cap can invest in European businesses of all sizes but has a strong focus on smaller companies, targeting the continent's minnows. The manager believes that lesser known quoted companies tend to be more attractively valued than the household names, and these are usually found amongst small caps. He looks for undervalued stocks with above-average growth potential and strong management teams. This fund currently has just over 11% invested in Italian businesses.

Another option is Jupiter European, which is also run using a bottom-up selection process. Manager Alexander Darwall has been at the firm since 1995 and has managed the fund for 17 years. He favours high-quality companies which have strong competitive advantages and which can perform well regardless of where we are in the economic cycle. His fund has a small weighting to Italian stocks, currently: 3.56%.

While Italy has been the focus of equity and bond markets recently, we believe it pays to look beyond the headlines and take advantage of the volatility.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.