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German Elections - More Of The Same?

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Summary

In a busy year for elections, Germans head to the polls on Sunday

5 min read

Voters in Germany head to the polls for federal elections on Sunday. The latest opinion polls show a 15 point lead for the CDU/CSU over the SPD, their coalition partner and closest challenger. 

Angela Merkel is the strong favourite to secure her fourth term as Chancellor as leader of the largest party. Yet political risk about the eventual outcome of the election does remain, given the fragmented nature of the party political system.


Political risk remains

Europe’s busy calendar for elections in 2017 was a major source of uncertainty for investors at the beginning of the year. Fears about the implications of a rise in populism prevailed. European stock markets and the Euro have performed strongly, however, since the stunning victory of Emmanuel Macron in France’s Presidential election in May. Macron won by coming through the middle as a new force, with a pro EU and reformist agenda, at the expense of the traditional parties of the centre Left and Right. The German election provides another gauge of sentiment towards the established parties, the centre right CDU/CSU and social democratic SPD, now headed by Martin Schulz, former President of the European Parliament.

“Issues during the campaign have revolved around the Government’s response to last year’s immigration crisis and terrorism, and the role Germany should play in international affairs.”

The closeness of the relationship between politicians and the car industry has also come under scrutiny in the wake of ‘ dieselgate ’, the scandal relating to the use of ‘defeat devices’ for emissions testing. An improving economy, receding fears about refugees after the EU’s agreement with Turkey, and waning popularity for Schulz all mean that the CDU/CSU’s lead over the SDP in the polls has widened in recent months.

Six parties are polling 8% or more ahead of Sunday according to the latest Financial Times opinion poll tracker.

Populism and protest may still play its part. The anti-immigration Alternative for Germany (AfD) party’s poll rating has retreated from its peak last year when it reached 15%. However the party may still secure well over 5% of the national vote to breach the threshold for seats in Germany’s parliament, the Bundestag, for the first time.

Political uncertainty may ease once the election is over. Negotiators in the Brexit process believe that it will be easier to make longer term decisions at the start of a fresh electoral term for a new Chancellor. For President Macron, his agenda for EU reform and greater integration within the Eurozone can be addressed. The creation of an economics and finance ministry with a common budget are aimed at ensuring greater stability and more flexibility in dealing with any future crisis.

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Recovery continues

For investors, the focus remains on the strength of the European economy and the outlook for corporate earnings. Business and consumer confidence as well as economic growth have picked up in Europe this year. The continent’s economic recovery has been led by Germany since the financial crisis. Exports were boosted by a pick up in global growth, in the US and China at first, and now in other parts of Europe. Recent statistics are positive. German GDP growth in the second quarter stood at 2.1% year on year, driven by domestic consumption and manufacturing. Unemployment has fallen to 5.7%, the lowest since reunification. Bank lending continues to grow.

Aided by the labour market reforms of Chancellor Schroder and by entering the Euro at a competitive exchange rate, Germany’s manufacturing sector underpins its exports with vehicles, machinery equipment and electrical products leading the way. The importance of the car industry is well known. It employs over 800,000 people directly and 500,000 indirectly, and represents around 17% of Germany’s exports. But Germany’s manufacturing strength does not just lie with its global leaders.

Mittelstand typically are medium sized companies with sales of up to €50m, employing up to 500 people, with strong global market positions in niche areas. They are characterised by being family owned and committed to apprenticeships and training. With its reform agenda looking to boost employment and exports, the new French government recognises that France is underrepresented in this size of business in contrast to Germany.

“The contribution of the Mittelstand companies to the success of the economy’s manufacturing base and exporting prowess is well recognised.”

Twin Surpluses

The recovery means that Germany is now running a budget surplus. This stood at €18.3bn in the first half of this year, the second highest ever, due to rising tax receipts. The favourable fiscal position may allow any new government to address social and regional inequalities, particularly in the former GDR, that have been raised during this election campaign. An ageing population is another long term challenge for the country. Over 20% of the population are over 65 years old with only Japan and Italy having a higher proportion, according to a recent study by Deloitte.

Germany is also operating a current account surplus of over 8% of GDP, reflecting that it has the highest trade surplus of any country with the rest of the world (over $300bn at the end of 2016). This has certainly attracted President Trump’s protectionist instincts. Given the divergent performances within Eurozone economies since the financial crisis, there is a belief that the German economy should focus less on savings and exports and more on domestic consumption and investment, particularly on the country’s infrastructure. This would assist addressing the global imbalances.

 

Investor concerns and opportunities

Once the votes have been counted, the new government will have a full political agenda both domestically and internationally.

With inflationary pressures still subdued in the Eurozone, the ECB looks set to remain cautious in reining in its bond purchasing programme.

As the last year has shown, predicting election results and the reaction of markets to them is difficult.  For our clients, we will continue to invest in Europe for the long term with fund managers who can identify outstanding companies that can benefit from an improving European and global economy, however uncertain and fluid the political background. We also select direct European equities in areas as diverse as chemicals companies and tyre manufacturers, where we see good growth opportunities and sustainability of margins.

KEY TAKEAWAYS

The polls suggest a strong outcome for Angela Merkel. What challenges and opportunities will she face in her fourth term – and how does an economically and politically robust Germany fit into Europe and the world?

About Adam investments

We offer discretionary investment management to individuals and their families, and to charities. We take a long term approach to investing and we believe this gives us an advantage in a world where markets and media are increasingly focused on short term news.

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