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Germany: investors face choppy markets after election

Fund managers warn surge of far-right populists in Germany could spark market volatility, but others say fourth term for Merkel will allay fears.

Germany: investors face choppy markets after election

Fund managers have warned the breakthrough of far-right populist party Alternative für Deutschland (AfD) in Germany's elections could herald a choppy time for European markets.

German federal elections saw chancellor Angela Merkel's conservative CDU/CSU remain the largest parliamentary bloc, despite suffering its worst result in almost 70- years.

But the election's biggest news was the surge of the right-wing nationalists AfD to become Germany's third biggest party.

Dylan Ball, manager of a number of global and European funds for Franklin Templeton, said AfD's rise could spark volatility in European shares.

'Some may see the AfD's rise as a re-emergence of the sort of populism that we saw expressed in the UK Brexit vote and to a degree in the US presidential election,' he said.

'Such populist concerns may lead to higher volatility in European equities,' he added.

'As a result, the market is likely to be more defensive and more cautious in terms of valuations. We’d expect the more defensive technology and consumer staples sectors to hold in fairly well, compared with financials or energy stocks.'

Evelyn Herrman, Europe economist at Bank of America Merrill Lynch, said the election result threatened to challenge the market's perception of 'highly predictable and stable German politics'.

While Merkel will remain as chancellor, the 'grand coalition' of her conservative bloc with the Social Democrats (SPD), Germany's second largest party, looks over, after the SPD ruled themselves out.

'With the status quo (ie, a grand coalition) no longer available, the political agenda for the next four years is particularly opaque,' said Herrman. 

'This leaves two options for government formation: a so-called "Jamaica" coalition [a nod to the yellow, green and black colours of each of the parties] between the CDU/CSU, the liberal FDP and the Greens or a minority government by CDU/CSU.'

Stefan Koopman, market economist at Rabobank, said negotiations over a new government could last until December.

But despite this uncertainty, market reaction to the election results, and stock market movements ahead of the poll, have been muted.

The German DAX 30 has edged 0.2% higher today, while the euro is down 0.6% against the dollar and 0.7% against the pound.

This contrasts with investors' jitters over French presidential elections earlier this year. Markets were hit by fears over a victory for far-right candidate Marine Le Pen, before rallying strongly once it became clear centrist Emmanuel Macron would prevail.

'In contrast to the French elections there was hardly any tail risk priced in before these elections,' said Koopman.

'The chances of an outright AfD win were always extremely small, if not zero. The German federal elections are also not a binary event, with an explicit "market-friendly" and a "market-adverse" outcome like the referendums on Brexit, but instead present the market a limited set of colaition scenarios and probabilities.'

But Wolfgang Bauer, bond fund manager at M&G, argued the election results could still carry a sting in the tail for the euro.

'The success of the AfD at the ballot box might challenge the prevailing narrative, particularly since the Dutch and French elections, that anti-EU populism was on the decline,' he said.

'This could have implications for markets, which arguably have become somewhat complacent in this regard. The euro, which has been going from strength to strength in recent months, might get under pressure.'

But Diego Franzin, co-head of equities at fund group Amundi, said that while the composition of the next coalition would have 'a very significant signalling effect for the markets', the presence of Merkel at the helm was likely to dampen political risk.

'With Europe's two largest economies now being led by two pro-European coalitions, we expect the cyclical recovery to continue,' he said.

'We anticipate a positive performance of the more value-orientated parts of the market such as banks, energy, industrials and telecoms as the economy improves further.'

Nick Peters, fund manager at Fidelity, agreed that the new German government was unlikely to herald a dramatic change of approach.

'Merkel's governments have promoted German growth mainly through external competitiveness and, although there is a need to rebalance the economy somewhat, it is unlikely the new government will significantly change tack with Merkel still chancellor,' he said.

'This should be positive for export-orientated sectors, such as industrials and healthcare, though the auto sector faces some stronger specific challenges that will be important for relative performance.'

Tilmann Galler, strategist at JP Morgan Asset Management, agreed. 'For the markets, this is a very comfortable position, with no extreme outcomes that could challenge the current framework in the EU or the eurozone,' he said.

'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.'

5 comments so far. Why not have your say?

kenneth douglas

Sep 25, 2017 at 17:47

Another round of unfounded garbage, What is it with these people, so called experts ( drips under pressure). There is only two ways to go, why is it, these clowns always spout the negatives.

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an elder one

Sep 26, 2017 at 12:08

A plethora of maybes

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an elder one

Sep 26, 2017 at 12:09

such is the study of economics

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an elder one

Sep 26, 2017 at 14:27

a study in probabilities; a branch of mathematics that few understand

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Mark Stringer

Sep 30, 2017 at 18:50

Kenneth Douglas, spot on. It is a shame a proper in-depth piece isn’t done instead of the sound bite drivel.

If there was any justice Merkel would have lost.

You would think the world was populated solely by the TED generation of 5 minute presentations posing as content.

I’m still waiting for the post Leave EU vote implosion.

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