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Market Memo: A likely Merkel victory should be good for German stocks

As of 08-14-2013

Although anything can happen during the next two months, the Christian Democratic Union/Christian Social Union (CDU/CSU) “Union” Party led by German Chancellor Angela Merkel is likely to stay in power after September’s elections. Our poll of polls—we statistically analyzed three separate German opinion polls—suggests Merkel could capture 42% of the vote, which would be historic for German elections.

Yet even this potential result would not provide a clear government majority, meaning Merkel’s CDU/CSU likely will have to form a coalition government. What has led to this potentially historic 42% result, you may ask? Merkel’s government is perceived to have balanced Europe’s problems with Germany’s interests. With unemployment shrinking and wages growing, a strong 60% of Germans believe the “economic situation is a good one” and an even stronger 70% perceive “their economic situation as a good one”—the highest in 16 years.

How would Merkel’s reelection impact growth, austerity and market dynamics in Germany and throughout the rest of Europe? The current coalition government—Merkel’s center-right CDU/CSU along with the Free Democratic Party (FDP)—believes a self-reliant combination of austerity and reforms is needed for the troubled European peripheral countries to regain competitiveness. If the FDP achieves the minimum 5% threshold of vote, this coalition could extend and remain status quo. However, the poll of polls is unclear whether this may occur.

Moreover, the CDU/CSU is far ahead of any other parties at this point, with the socialist Social Democratic Party (SPD) a distant second. The SPD is widely viewed as being more moderate on austerity measures and a promoter of more public investments. However, because SPD leaders stated they would not join together in a grand coalition government and because the party is unlikely to achieve a close second-place finish, it is hard to envision the election result could influence policy outside of the continued status quo. In fact, none of the major German political parties have been campaigning on a policy of changing the direction of “euro policy.”

A pro-Europe bent
Therefore, the next Merkel-led coalition government likely will continue to be pro-Europe and may even find more financial transfers acceptable under the European Central Bank’s Outright Monetary Transactions (OMT) program, formed a year ago to reinforce the  EU’s monetary union by purchasing the sovereign debts of country’s that strive to abide by the EU’s economic guidelines. At the outset of the OMT launch last August, the German government confirmed its desire to keep the 17-member union together at all costs and German voters appear willing to accept this implicit pledge.

It helps that Germany’s economic situation is solid relative to its euro-zone neighbors. At 5.3%, unemployment remains at a post-reunification low, helping promote real wage gains and support private consumption. House prices are rising. Polls indicate the public is comfortable with the political status quo as well as the handling of the euro crisis, and their optimism is likely to be confirmed by next month’s elections.

As for the markets, history suggests that Germany equities tend to appreciate six, nine and 12 months forward after CDU Party victories. When the SPD Party wins, the markets’ performance has generally been less favorable. Given our view that the euro zone is stabilizing and the outlook is improving for several other key economies of the world, including the U.S. and Japan, a status-quo election in Germany with the favored center-right government remaining in charge should keep German equities on their upward march even though they’ve already risen 33% over the 12-month period through July. Further, we believe the German corporate sector remains favorably priced relative to U.S. equities.

In other words, with September’s looming elections, now is not the time for long-term investors to exit Germany.


 
 
 
 
 
 
 
 
 
 
 
Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.
Federated Global Investment Management Corp.
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Copyright © 2014 Federated Investors, Inc.

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