German Election 2017: Not a Market Game Changer
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German Election 2017: Not a Market Game Changer

Angela Merkel is in the best position to win the German election, however uncertainty prevails regarding the coalition. We retain our positive view on German equities.

Before the German election, Angela Merkel's CDU/CSU party continues to lead in the polls with a solid advantage over her Social Democrat (SPD) rival Martin Schulz. The sole one-on-one TV debate did not seem to put Angela Merkel in danger, and she was rated by viewers as more convincing than Martin Schulz. Opinion polls have remained broadly stable ahead of the 24 September election with the CDU/CSU trending at 38 percent and SPD at 23 percent.

Will There Be a Coalition Change After German Election?

With Angela Merkel being the clear favorite in German Election, and expected to secure a fourth mandate as head of the strongest European state, the main question relates to coalition formation, as a single party is unlikely to secure an absolute majority in the Bundestag. A center-right alliance with the liberal FDP would likely be preferred by the CDU and would be the most market-friendly coalition, although polls currently fall short on such a majority.

The participation of the Green party, in a so-called "Jamaica" coalition, could help secure the last required seats, but a three-party alliance would be a novelty at the federal level and could be more volatile. According to projections, only a continuation of the current Grand Coalition (CDU/CSU+SPD) would achieve a majority and thus appears the most likely outcome.

Estimated share of Bundestag seats (percents) based on latest polls

Estimated share of Bundestag seats (percents) based on latest polls 

Last data point: 6 September 2017
Source: Wahlrecht.de, Credit Suisse 

CDU and SPD Favor More Eurozone Integration

All parties have pledged to deliver modest tax reductions as well as increase infrastructure and defense spending in the run-up to German election. A deeper European integration will also be a key theme for the new government. All major parties remain pro-European and Angela Merkel's CDU and Martin Schulz' SPD favor more integration, while a coalition with the FDP would likely entail a reduced appetite to move toward a deeper Eurozone cooperation. In any case, coalition negotiations are expected to be protracted and could take until the year end.

Limited Market Movement Expected

Unlike the French presidential vote , which took place earlier this year, investors are currently anticipating little volatility as a result of the German election. The domestic political stability does not make the event a potential trigger for large market repositioning.

As part of our European strategy, we continue to favor German equities irrespective of the election outcome. Most of the DAX indices have suffered from the stronger euro at the beginning of the summer, and valuation has become attractive relative to other regions which are being supported by a continued strong macroeconomic picture.

In fixed income, German sovereign bonds have had a good performance within Europe, over the past month, in light of rising geopolitical tensions and reduced expectations of rapid ECB monetary tightening. At the same time, valuation is close to being expensive, so we remain neutral on German bunds going into the busy third quarter.