The German elections are taking place this Sunday 26th of September. Germans will elect the lower house of the federal parliament, the Bundestag, these elections will mark the end of Angela Merkel’s 16 years in office. Although we will be able to know who is the winning party on the night, we will only know who the next government will be once the winner is able to form an absolute majority in parliament with one or two other parties. So the next chancellor will not be known immediately.
We had the opportunity to ask some of the most relevant German figures from within the asset management industry about their thoughts on the election, what will happen next, and if the change of government and the departure of Angela Merkel will have any effects in the markets.
Bert Flossbach, Co-Founder of Flossbach von Storch
This election is a directional election. A certain mildew has settled over the country as a result of the Grand Coalition. Important reforms, such as those of the statutory pension insurance, have not been seriously discussed, let alone implemented. The existing system will reach its limits much sooner than younger people in particular imagine today – pension contributions will skyrocket, to the detriment of the younger generation. Instead of seriously trying to solve the problem, the government’s motto so far has been: Keep it up.
That is sobering. What the country needs now is a new spirit of optimism. Many people can no longer stand the encrusted and status quo-oriented policies. The question is, can this optimism actually be generated with the outcome of the election? We are cautious about making predictions about the election outcome and thus possible government coalitions.
There are various options for forming a government, that yes. And we assume that it will take a while until the future government is found. Everything else we will see. It would be important that the new government is primarily concerned with the future viability of the location – in terms of ecology and climate protection, but not only.
The pension system mentioned earlier is also particularly important.We are often asked what the election means for investors. As is so often the case, it depends on the perspective. Investors and pension savers from Germany are logically following the election campaign closely.
Depending on which parties form the government in the future, there could be changes in the taxation of investment income, among other things. In this respect, the election outcome is relevant. From the perspective of the international investor, things are different. He had better not overestimate the election outcome, at least not as far as its long-term effects are concerned. For those who invest their assets globally, in first-class companies from different currency areas, the election in Germany is a non-event.
Christian von Engelbrechten, Lead Portfolio Manager, Fidelity Funds Germany
How quickly can things change in politics! Only a few weeks ago many observers thought a black-green coalition (combining the Christian Democratic Union and the Greens) would be the most likely outcome of the German elections, with the Social Democrats (SPD) back then hovering around 15-18% voting share in polls.
However, over recent weeks, polls have shown strong gains by the SPD, and losses by the CDU and Greens. As a result, as things stand, a three-party coalition seems the most likely outcome, with several potential combinations and a high uncertainty in terms which coalition will ultimately be formed. This makes it even more difficult to anticipate which policies will ultimately be agreed on.
While it is difficult to know which coalition will win and which policies will be adopted, it is worth remembering that coalitions generally result in compromises and that agreed policies might look quite different from the involved parties’ intentions ahead of the election. For example, I remember that ahead of the 2005 election the SPD ruled out a VAT increase, the CDU wanted a 2 percentage point increase and in the end it turned out too be a 3 percentage point increase! Given parties’ policies can differ on many aspects (e.g. on real estate, energy policy, taxes…), it will be important to analyse the newly-formed coalition’s policy statement, which is likely to inform future government policy.
In addition to coalition-based compromises, one shouldn’t forget that for important decisions often the agreement of the upper house (Bundesrat) is required, which can dilute the lower house’s decisions. For instance, I think the upper house has to agree on many aspects of personal income tax and corporate tax changes. And on top of that German politics move within the borders set by the German constitution with a strong constitutional court.
It is also important to keep in mind that concerns ahead of elections often do not materialise. This was the case with the first red-green coalition in Germany more than twenty years ago, or the victory of Francois Hollande in France in 2012. Even if one forecasts the political outcome correctly, the eventual impact on markets can still end up being different than expected. Back in 2016, many market participants were worried about Britain voting to leave the EU (Brexit referendum) and Donald Trump becoming US President, but the market rallied subsequently.
With many moderate and pragmatic politicians among the SPD and Greens I think the only coalition that might lead to more significant changes could be a red-red-green one (left-wing/greens coalition), but I consider that rather unlikely and with the ultra left probably reasonably small within this coalition their more extreme agenda items would be unlikely to materialise, particularly when bearing in mind the aforementioned roles played by the upper house and constitutional court.
While many market participants favour a CDU-led government and are worried about a left-wing-led government due to potentially higher taxes, reform reversals and more regulation, this could also result in a potential increase in spending and a less strict position on common debt in Europe.
The latter two would been seen as potentially positive by markets and could counter the negative aspects previously mentioned. This makes anticipating the market reaction very uncertain, even if a left coalition were to form the basis of the next government. In this scenario, sectors such as real estate might be under more pressure, while conversely others such as industries enabling climate protection could benefit from a more left-wing coalition.
I do not position the fund (Fidelity Germany Fund) for any particular outcome. I will await to find out the formed coalition’s programme and, based on that, will analyse the impact on companies (taking into account their reaction to likely future government policies). It is worth keeping in mind that companies are dynamic and can adjust to different frameworks. For instance, German companies demonstrated their adaptability in the early part of the century when the German consumer was weak and they successfully pivoted towards foreign markets and exports. Ultimately, rather than focusing on short-term noise/speculation, I think it is important to keep in mind the long-term value creation potential of a company. I focus on attractively valued companies that can reliably earn above their cost of capital and generate superior growth thanks to new products, innovation, market share gains, capitalising on megatrends, etc. – characteristics that should ultimately get reflected in share price re-ratings.
Dr. Hans-Jörg Naumer, Director Global Capital Markets & Thematic Research AllianzGI
A three-party coalition is emerging for Germany, although the composition is still not clear shortly before the election. Not only that strong swings were noticeable in the polls over the past few months, the proportion of undecided voters is also significantly higher than usual at over 40%, according to Allensbach-Institute for public opinion. That leads to the expectation that the polls may diverge with the election results.
Political stock exchanges seem to have “short legs”. If you trace back the development of the DAX since its inception around the election days, apart perhaps from the elections in the 80s, there is hardly any life of its own. The performance shows few deviations in comparison with the MSCI Europe and the MSCI World three months before and after the election. With this choice, too, the economy, monetary policy and the general weather situation on the international capital markets should dominate in the medium to long term.
This should also be the case this time. The stock exchange itself, nationally and internationally, has so far hardly taken notice of the federal elections. At the international level, it is hardly to be expected that there will be bigger effects. This would only be the case if it came to an alliance that e.g. changed the geostrategic situation of Germany, which would be a clearly negative signal for the stock exchanges. This cannot be ruled out, since both the SPD candidate, Olaf Scholz, and the Green’s candidate, Annalena Baerbock, have kept the statements about a coalition with the party “Die Linke” open. The latter is in favor of Germany leaving NATO.
“Climate” is right at the top of the agenda for all parties. Under the government of Angela Merkel, the Paris Climate Agreement came about, and the EU Green Deal was passed. From the base year 1990, Germany’s CO2 emissions were reduced by 37%. The CO2 intensity, i.e. the CO2 emissions per unit of gross domestic product, has fallen to a fifth since 1960. So today Germany produces five times what it did in 1960, with the same amount of greenhouse gas emissions.
The question that arises in the context of “climate” is the question of how the next government will deal with this issue. With a world market share of 14% in environmental technology, Germany has a real chance of becoming the world export champion in terms of climate neutrality. To do this, however, the framework conditions for investments must be right.
On European policy, Olaf Scholz (SPD) positions himself in the direction of a fiscal union. The unemployment insurance should become a European one. That would not be possible with Armin Laschet (CDU).