Don’t expect drama from the German election

All indications are that Angela Merkel will remain chancellor for another four years when Germany goes to the polls on 24 September. The last major election of the year is expected to come and go without any political drama or market disruption.

From an investment perspective, this outcome has already been priced into the financial markets. A Merkel-led government would probably pursue largely unchanged policies with limited impact on markets. For example, Berlin would almost certainly continue to emphasise fiscal discipline and reject eurobonds or other forms of common debt.

Merkel’s re-election would bring continuity not only to Germany but also the wider eurozone. Germany’s undisputable support of the euro makes its stability crucial to the currency. Many political observers expect closer collaboration between France and Germany as one of Merkel’s top priorities is to work with French president Emmanuel Macron on the European Union’s future.

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A Merkel win could also be positive for the UK’s Brexit negotiations. As Europe’s most senior leader running its most important economy, Merkel is in a unique position to create consensus among country heads which could help talks go smoothly.

But for investors, other market factors will remain far more important over the coming months than the German election, such as the growth trajectory of the eurozone.

The coalition question

While we have seen over the last two years that polls don’t always get it right, the German polling institutes have a good track record of predicting the outcome of federal elections. Those polls have for some time put Merkel’s centre-right Christian Democrats (CDU) at around 38-40 per cent, the centre-left Social Democrats (SPD) on 24 per cent and each of the smaller parties – the Green Party, the liberal Free Democratic Party, the left wing Die Linke and right wing Alternative for Germany (AfD) – at around 7-9 per cent. This is relatively close to the 2013 election result.

What remains unclear is whether the new government will continue to be a coalition of Merkel’s CDU and the Martin Schulz-led SPD or a new coalition of parties led by the CDU.

A continuation of the ‘grand coalition’ between the CDU and SPD remains the most likely outcome, but one of the other possibilities – if Schulz’s party declined to form a new coalition – would see the CDU join forces with the Green Party and the FDP. This would be a first for a German federal government and would probably require lengthy coalition negotiations. It would not be unfavourable for investors though, as the combined weight of the CDU and FDP would mean a more centre-right economic approach, with concessions for environmentally-friendly policies.

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Another possibility is a straight coalition of the CDU and FDP, which could lead to further reforms and deregulation, but the polls say such an outcome is unlikely. Whatever coalition is created, we would not expect any surprises to financial markets from any CDU-led government. Strong growth and economic stability should work in Merkel’s favour and preserve the political status quo.

Italian election could be one to watch

The upcoming Italian election has the potential to create more disruption. The main threat to the more traditional ruling parties has been the Five Star Movement, which wants to hold a referendum on the euro and Nato membership. Markets currently believe Italian politics has little capacity for major change, however.

If continuity is maintained in both elections, it should be good for the stability of European equities. At Coutts, a typical Balanced portfolio has 6.5 per cent exposure to such stocks, which is our biggest relative overweight. The German election is not likely to change that as long as economic fundamentals remain supportive. Political events rarely have any significant, sustainable impact on markets or our portfolios – as we saw following the French presidential election earlier this year.

We will therefore continue to focus on the fundamentals which point to robust global economic growth. It is this, after all, that ultimately drives returns.

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