Market Comment: Merkel wins, but with less unity in Parliament

News item -

German election results were almost, but not completely, as expected. Angela Merkel has won her fourth term as Chancellor, but she now has less support. While her conservative CDU party remains the largest parliamentary party, its share of the vote declined to a low last seen in 1949. Most concerning is that there is now more fragmentation in the German Parliament. The newcomer AfD party gained 13% and the liberal FDP gained 6%, ending up at 10.7%. CDU lost almost 9% and SPD’s share declined by 5.5%, tallying 33% and 20.5% respectively.

Merkel now has a challenging task on her hands to form a governing coalition. We think that there are two likely options. One is the continuation of the grand coalition between CDU and the SPD. The negotiations and formation, however, might take a while, as SPD has announced that it plans to go into opposition. SPD has also shifted to the left of the political spectrum, so if this coalition occurs, it probably means that government policy might also shift a bit to the left.
 
The second option would be a union of Merkel’s CDU party, the FDP and the Greens. This is known as the Jamaica coalition, referring to the symbolic colors of the parties involved. This coalition faces the challenge of bridging differences between all of the parties about environmental policy, taxes and refugees. FDP and the Greens have also stated that they believe it would be difficult to work together.

What’s important for investors

For investors, what  is important is that it will take longer than usual to form a government in Germany following this election outcome, which still remains uncertain. Elections in Lower Saxony on 15 October could cause further delay.

Markets remain as usual

We had expected that yesterday’s election results could cause a slight risk-off reaction in financial markets, which would resonate with other risk-off sentiment emanating from geo-political risks elsewhere, namely the US/North Korea tensions and the Catalunya referendum in Spain. But so far, the initial impact on markets has been minimal. The euro and Bund markets remain stable and, at opening, European stock prices remain almost unchanged.
If any adverse market reaction does occur, we expect it to be short-lived. Germany remains a very stable and democratic nation. Macroeconomic and company fundamentals in Europe remain strong. Any short-term effects of the  election in Germany are not expected to materially affect European growth or earnings fundamentals. We continue to favour European (and emerging markets) equities over the US, as these equity markets benefit from synchronised global growth, low inflation and double-digit earnings growth.
 
Gerben Jorritsma, Global Head, Investment Strategy & Portfolio Expertise

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