What impact could the German election have on equities and bonds?

This Sunday, 26 September, marks the end of an era for Germany. After more than 15 years at the helm, Chancellor Angela Merkel is stepping down and a new Chancellor will be voted in in the federal election.

Under the leadership of Chancellor Merkel, Germany’s power and influence on both the European and global stage has been indisputable. This has left many questioning whether Germany’s golden age is over.

And, with just a couple of days to go, there is little separating the two main parties. Businesses large and small are wondering what that will mean for them after a very tough 18-months.

So we asked some Elite Rated managers their thoughts on the outlook for German companies and their favourite stocks.

The view from fixed income managers:

TwentyFour Dynamic Bond manager, Gary Kirk, said the CDU’s (Merkel’s party) poor polling increases the chances of the first ‘left-of-centre’ German coalition government over 16-years, raising concerns about higher spending and taxes in the most important Eurozone economy.

M&G’s Wolfgang Bauer agrees: “If Olaf Scholz (the Social Democratic Party’s candidate) replaces Angela Merkel after the elections, this would have a meaningful impact on Germany’s fiscal policy stance,” he said. “The election manifesto of the Social Democrats leaves little doubt that Scholz’s party considers fiscal austerity entirely the wrong approach in the post-Covid environment.”

A Scholz government couldn’t immediately reverse the situation, not least because it is unlikely to have the majority in both chambers of parliament to vote it through. But within the German constitutional framework, the Social Democrats may try to exhaust all possibilities to raise debt levels to fund public spending. “Bond investors should thus brace themselves for heightened levels of German government bond issuance, which may put upward pressure on Bund yields,” he said.

“Another aspect that becomes abundantly clear in the election manifesto of the Social Democrats is the party’s strong commitment to sustainability goals, and climate neutrality in particular,” he continued. “In fact, the word “Klima” (climate) is mentioned a whopping 67 times in the text or, on average, once a page! Large-scale public investment programmes targeted at green infrastructure and technological innovation are likely to be launched in order to help promote the socio-ecological transformation of the German economy, especially if the Social Democrats form a coalition government involving the Green Party. Undoubtedly, such a profound government-backed push towards sustainability would produce winners and losers within corporate Germany.”

The view from equity managers:

When it comes to equities, there seem to be a plethora of opportunities in Germany’s smaller companies, if the weighting in Elite Rated funds are anything to go by.

Nick Williams, co-manager of Barings Europe Select, has 13%* invested in the country. “Recent German elections have seemed fairly predictable,” he said. “However, with Angela Merkel’s long tenure now ending, the upcoming German election does have the propensity to increase market volatility in the short-term.

“With an apparent leadership vacuum in German politics, leading to an open race to run Europe’s largest economy, a bewildering variety of leadership and coalition outcomes seems possible – increasing uncertainty about future economic, environmental and European policy.

“However, despite this short-term uncertainty, there remain opportunities to invest by focusing from the bottom-up, and identifying companies whose earnings profile is driven by long term fundamentals and growth opportunities.

“Germany is home to a diverse range of small and mid-sized companies, among which many enjoy strong growth potential across both Europe and more internationally, in sectors that go far beyond Germany’s traditional mechanical engineering and industrial strengths, to include medical technology, online retailing and media. For example, SIXT, the car rental company listed and headquartered in Germany, is well positioned to benefit from easing travel restrictions globally, and revitalisation in vacation activity across Europe and the U.S.”

Mark Heslop, co-manager of Jupiter European Smaller Companies fund, has 14%* invested in the country and is not concerned about the possible election outcomes. “While the market may today worry about the impact of a single event such as the German election, we are more excited about the outlook for the events market in general and the ability of its market leader to further consolidate its position,” he said.

Fund holding CTS Eventim is Europe’s leading provider of tickets for live events. “Live entertainment clearly suffered during this crisis, but is showing signs of recovery,” Mark said. “In this industry, having a good user experience and customer interface is important, but it is the content and access to customers that is key. Promoters guarantee fees to artists and need to partner with ticketing platforms with the greatest customer reach to maximise revenues.

“Selling around 250mn tickets per year, CTS is the market leader in Europe. Combined with its network of promoters it has created a marketplace with one of the largest live event inventories globally. CTS is indispensable to promoters and the first port of call for consumers. CTS will not only be a major beneficiary of a return to normality but will also continue to benefit from the consolidation of an attractive market.”

Ben Griffiths, manager of T. Rowe Price European Smaller Companies Equity, has 12%* invested in German companies. “We have long found a number of very attractive opportunities in the German market,” he said. “One such situation is Knaus Tabbart which came to market about a year ago. Although a truly small company (market capitalisation is around EUR700m), it has a good competitive position in European leisure vehicles.

“The pandemic has caused many people to purchase a caravan or motorhome, but we do believe that this is a long term structurally growing industry. Notable supporting features include demographics (typical purchaser are in their ‘50s), increasing domestic tourism due to environmental reasons and simplicity, and an underpenetrated German market – for example, there are twice as many vehicles per capita across the borders in Scandinavia. Although the shares have performed quite well, we believe that the valuation is very attractive as the business delivers on its growth potential.”

Chris Garsten, co-manager of Waverton European Capital Growth fund, added: “In the upcoming German elections all parties, except for one of the smallest (the AFD), support the Paris Agreement’s targets to limit global warming to 1.5°C. Extreme-weather events have put climate change under the spotlight in the country, reinforced by the summer 2021 floods where more than 184 people died. This was the deadliest natural disaster in the country since the North Sea Flood of 1962.

“As a result of this green agenda, some say that the age of air travel is over – we strongly disagree and the recently announced investment by Shell into sustainable air fuel in Rotterdam suggests we aren’t the only ones. We own shares in Frankfurt Airport (Fraport), which, thanks to the pandemic, has slashed costs. When travel returns it will be a much more efficient company and the shares, from a low base, should perform extremely well.”

Niall Gallagher, manager of GAM Star Continental European Equity concluded: “As fundamental equity portfolio managers, we generate alpha for our clients by investing in companies, not countries. But that’s not to say political changes never matter – Germany would be a very different investment universe without the Hartz Labour Reforms, and the new European Sustainable Finance Disclosure Regulation has the ability to dramatically alter a company’s cost of capital.

“We hold a number of German-listed stocks, and we highlight two which are squarely exposed to structural megatrends. Online fashion retailer Zalando operates in multiple countries and is turning retail on its head by putting technology and big data at the heart of the customer proposition. It also has a market-leading sustainability strategy – do.MORE. As such, it benefits both from heightened consumer focus on sustainability, and also the shift from offline to online shopping.

“Infineon is heavily exposed to the exciting growth of electrification in the car industry as the largest global supplier of high- end power semiconductors, a crucial component of the electric power train and charging infrastructure. As car making transitions to electric we expect to see persistent, double digit revenue growth in Infineon as the amount of Infineon content per car multiplies.”

*Source: fund factsheet, 31 August 2021