An empty victory for Merkel

Merkel’s diminished standing in the polls will likely disappoint proponents of European rebalancing, comments Ian Ormiston, manager, Old Mutual Europe (ex UK) Smaller Companies Fund, Old Mutual Global Investors.

So, the headlines focus on a fourth term for Angela Merkel and the first time appearance of the right wing, AfD party, in the Bundestag. But the underlying story is similar to elsewhere in Europe with the large centrist incumbents losing seats. As with France, while the right has risen versus the previous election, the resultant losses have been picked up by other centrists, the resurgent pro-business FDP party in these elections.

What does this mean for Germany and, more importantly, for stock markets? We will have protracted coalition talks as the socialist SPD party have indicated that they wish to lead the opposition and so the most likely grouping is centre right CDU/CSU, pro-business FDP and left-leaning Grüne (Green) party. This is likely to bring minor policy shifts at home, and more importantly, slow the momentum towards greater European integration which was building following Emmanuel Macron’s election as president of France. This will disappoint those that wanted European rebalancing led by more expansionary German fiscal policy and those that hope for an expansion of European structures to cope with the next crisis. For equity markets, we can probably look for more of the same, modest but adequate growth across the region and political pragmatism having little impact on earnings and valuations.