Chancellor Angela Merkel is in the best position to win a fourth mandate, but uncertainty prevails regarding the future
government’s coalition. Market volatility will remain contained around the event, and we retain our positive view on German equities.
With two weeks left before the German election, Angela Merkel’s CDU/CSU party continues to lead the race with a solid 15 points advance over her Social Democrat (SPD) rival Martin Schulz. The only TV debate between the two candidates last weekend did not seem to put Ms. Merkel in danger, and she ended up being rated as more convincing than her opponent. Opinion polls have remained broadly stable ahead of the 24 September election with the CDU/CSU trending at 38% and SPD at 23%.
Will there be a coalition change?
With Ms. Merkel being the clear favorite to secure a fourth mandate as head of the strongest European state, the pending question relate to coalition formation, as a single party is unlikely to secure an absolute majority in the Bundestag. A center-right alliance with the liberal FDP would likely be preferred bythe CDU and would be the most market-friendly coalition, but polls currently fall short of such a majority. The participation of the Green party (in a so-called “Jamaica” coalition) could help secure the last required seats, but a three-party alliance would be a novelty at the federal level and could be more volatile. According to projections, only a continuation of the current Grand Coalition (CDU/CSU+SPD) would achieve a majority and thus appears the most likely scenario. All parties have pledged to deliver modest tax reductions as well as increase infrastructure and defense spending. A deeper European integration will also be a key theme for the new government. All major parties remain pro-European and the CDU and SPD favor more integration, while a coalition with the FDP would likely entail reduced appetite to move toward a deeper Eurozone cooperation. In any case, coalition negotiations are expected to be protracted and could drag well into the yearend.
Limited market movement expected; we continue to favor German equities
Unlike during the French presidential vote earlier this year, investors are currently anticipating little volatility as a result of the German election. The domestic political stability does not make the event a potential trigger for large market repositioning. As part of our European strategy, we continue to favor German equities irrespective of the election outcome. Most of the DAX indices have suffered from the stronger euro at the beginning of the summer, and valuation has become attractive relative to other regions being supported by a continued strong macroeconomic picture. In fixed income, German sovereign bonds have had a good performance within Europe, over the past month, in light of rising geopolitical tensions and reduced expectations of rapid ECB monetary tightening. At the same time, valuation is close to being expensive, so we remain neutral on German bunds going into the busy autumn months.