Reactions following the German federal election

They now have a clear mandate to form a new coalition government in the coming weeks. Since all likely coalition governments will be led by the reigning CDU and Angela Merkel, no major policy shift should be expected for the coming four years.

For the markets, this is a very comfortable position, with no extreme outcomes that could challenge the current framework in the European Union (EU) or the eurozone. The German election will likely have a limited impact on fixed income and equity markets. 

Fears in the market 12 months ago that the growing popularity of the anti-euro and anti-immigration party AfD might lead to a radical change in German policy towards the EU and the euro proved unfounded.

Although the AfD received 13% of the popular votes, and the media coverage in the next days will be high, all other parties ruled out joining a coalition with them.

Additional Insights: Reactions from our investment teams

Multi-Asset Solutions

•       The outcome of the German election does not cause a shift in our overall asset allocation views or our views on euro area assets. The euro area is growing robustly above trend and this looks set to continue well into next year. Any likely German political developments from here will have little influence on this trajectory.
•      Markets will mostly care about the new government’s stance on further European integration and the prospects for looser fiscal policy. The precise shape of these will not be known for some time as forming the new government is likely to be slow. On the former, a fundamental change of direction is not on the cards, while on the latter some small upside to current GDP growth expectations is possible. The strong performance of the AfD is unlikely to have an immediate market impact.
•      As far as the ECB is concerned, it is unlikely there will be any immediate impact on monetary policy and tapering of asset purchases. If anything, if there is a notable rightward shift in German political discourse, that may increase pressure for tighter policy and higher bond yields. 
•      In our multi-asset portfolios we are overweight stocks vs. bonds. Within equities we seek regional diversification in an environment of broad global growth and historically low cross-regional correlations. This includes an overweight in euro area equities as well as overweights in the U.S., Japan and emerging markets. Within government bonds, German Bunds continue to be our key underweight position.

International Equities

•       Although CDU/CSU were first and Merkel will lead coalition discussions, forming that coalition is likely to be difficult, and will involve more than two parties –  most likely a so called Jamaica coalition (CDU/CSU/FDP/Greens).
•      If the FDP are part of the coalition this would be viewed as marginally good for business (they may press for lower taxes, which would amount to something of a fiscal stimulus) but they are also opposed to greater Euro integration and have specifically questioned Macron’s European programme which calls for a European finance ministry.
•      If the Greens are part of the coalition they are likely to press for greater environmental responsibility, but a lot of their policies (greater renewables, nuclear decommissioning, clamp down on vehicle pollution) are already part of the main political agenda of other parties. One policy which they are likely to push for is coal decommissioning. 
•      We believe the impact on markets is likely to be slightly negative because a range of less pleasant outcomes will need to be priced. Domestically, though, German demand may be viewed as likely to be boosted, which means that investors will be looking at retailers/real estate stocks.
•      In our funds we are still happy to have a pro-cyclical tilt, because the synchronised global growth that we are witnessing is of much greater relevance to corporate earnings than German politics.

Global Fixed Income, Currency & Commodities

•        Even though the election result is a bit more challenging than anticipated with regards to the timely formation of a stable government it should still lead to a continuation of the prudent fiscal policy and limited issuance of German Bunds over the next years. As the European Central Bank is well aware of the latter, it will continue to lead them to lower purchases in 2018. But as this has been well flagged and accounted for, market implications should not be significant in the near-term.
•      Economic policies need to be renegotiated under the new government but are expected to remain market friendly and should therefore not undermine the currently strong growth momentum in Germany as well as large parts of the Eurozone.
•      As the outcome of the German election has nevertheless to be described as largely market friendly and rather a continuation of recent developments as described above, our positioning in recent weeks has been and will remain light.

Alternatives: European Real Estate

•       The German property market has attracted considerable amounts of foreign investments in recent years and briefly overtook the U.K. as the largest investment market in Europe earlier this year.
•      The result of the German parliamentary elections is unlikely to change the positive momentum in the German property market as this momentum is driven by sustainable factors in the short to medium term.
•      Cities such as Berlin, Frankfurt and Munich have experienced a significant increase in occupier demand in recent years and this increase hasn't been matched by an increase in office, logistics or residential space and as a result rents are likely to continue to increase.
•      In addition, the relative attractiveness of the German property market is driven by the high and steady income returns that property investors can still generate in today's low interest rate environment in the Eurozone.

Read more: Lonely at the top: Angela Merkel and the CDU/CSU win the federal election

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