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Press release

German federal election: should we be prepared for market reactions?

After 16 years, Angela Merkel's chancellorship will end this year, and according to Dr. Tobias Burggraf, Portfolio Manager at Ethenea Independent Investors S.A., it will also mark the end of an era of politics that has stood for reason, pragmatism and stability like no other: “Angela Merkel has governed calmly with restraint and moderation. In the coming years and decades, however, changes will inevitably be necessary, as the major problems of this decade, such as climate change, digitalisation and social inequality, will have to be solved.”

An end to the politics of small steps?

According to Burggraf, when one looks at the election manifestos of the major parties, one is inclined to speak of an upcoming big bang, especially with regard to the issue of climate protection. The Greens, for example, say they are aiming for nothing less than an “energy revolution” by massively expanding renewable energy sources and imposing stronger sanctions on fossil fuels. The party around top candidate Analena Baerbock is also proposing a climate ministry with veto power in its latest immediate action programme. The FDP, on the other hand, refers to its role as a “role model and pioneer in climate protection”, only to then instead shift the responsibility to the markets by wanting to expand trading in emission allowances, according to the Portfolio Manager. After all, according to this party, the best way to achieve the CO2 targets is for the state to stay completely out of the issue. In the case of the two major parties, the CDU/CSU and the SPD, many things remain unanswered when it comes to climate protection. “Of course, the commitments set out in the Paris Climate Agreement are to be met and greenhouse gas neutrality is to be achieved by 2045, but concrete measures and targets are barely existent in either programme, less so in the CDU/CSU programme than in that of the SPD," says the Portfolio Manager.

Direction-changing coalitions unlikely

But what does all of this mean for the financial markets? “It is true that politics has played a subordinate role for financial markets in recent years,” says Dr. Tobias Burggraf. “In fact, in our view, there continues to be some evidence to suggest that the upcoming federal elections will once again have little impact on the markets.” The election results are still undecided and there are currently no signs of coalitions that would change the direction of the economy, such as an alliance between the CDU and the FDP or the SPD, the Greens, and the Left Party. According to current polls, a Jamaica coalition of CDU, Greens and FDP, as well as a traffic light coalition of SPD, Greens, and FDP could be possible.

“In any of these constellations, however, some compromises on content would have to be found,” says the Ethenea expert. “This would mean that radical demands would be watered down again.” In addition, experience shows that not all points anchored in the election manifesto would be implemented, and some would even fail due to their feasibility: “The CDU promises significant tax cuts, but there is uncertainty about the financial feasibility and about how the goal of a black zero without additional tax revenues is to be achieved,” Burggraf explains. In the ARD summer interview, the CDU Chancellor candidate even declared his own election programme null and void when he claimed that there was no mention of tax cuts in the CDU/CSU election programme. “This makes it almost impossible for us as Portfolio Managers to make a serious forecast about which programme points will be implemented, let alone what impact they will have on the capital markets.”

Short-term volatility not a cause for concern

The past has shown, however, that a change of government can always lead to short-term, even turbulent market reactions and increased uncertainty. However, after the announcement of the election result, these reactions subsided just as quickly as they emerged. “For example, we saw this in the US with the not entirely smooth transition from the Trump to the Biden administrations,” says the Portfolio Manager. Accordingly, he says it is important not to be rattled by a short-term spike in volatility, but to keep an eye on the long-term investment objective. “At the same time, as active Portfolio Managers with our multi-asset funds, we also have the necessary flexibility to be able to react to unforeseen developments at short notice and, as a result, limit drawdowns" he concludes.