Political uncertainty following the surge in popularity of Germany’s nationalist party could prove beneficial to the UK as the fourth round of Brexit negotiations begins.
German Chancellor Angela Merkel has been re-elected for a fourth term following the federal elections on Sunday, but her conservative CDU/CSU parties saw their worst result in almost 70 years.
Although the CDU/CSU alliance will remain the largest in parliament, the social democratic SPD – currently in coalition with the CDU/CSU bloc – has announced it will go into opposition, while the nationalist AfD party has won its first seats and is set to be the third party, prompting protests across the country.
Lee Wild, head of equity strategy at Interactive Investor, says it is likely Merkel will be forced into a coalition with the Greens and the Free Democrats (FDP), but in the meantime the uncertainty “poses a problem”, exacerbated by the FDP’s dislike of Macron, threatening Germany’s relationship with France.
“It’s possible that Angela Merkel becomes distracted from international politics during the inevitable horse trading following a disappointing election for her,” Wild says. “Any sense that this weakens the EU’s position could play into the hands of UK Brexit negotiators, as a fourth round of talks with European officials begins in Brussels today.”
John Taylor, portfolio manager at AllianceBernstein, says the result “makes for some uncomfortable political wrangling ahead” but says investors should focus on the impact of reduced central bank intervention and the wider outlook for risk assets.
“At these times, investors should think about being invested in parts of the market which have a robust fundamental outlook, such as bank bonds and local emerging markets, where a strong disinflationary trend is in place supporting further rises in local currency EM bonds,” Taylor says.
Jaisal Pastakia, investment manager at Heartwood Investment Management, says “populism is far from dead”, adding that there is a “slight feeling of disappointment from financial markets this morning”. The euro is down against the US dollar and European equities are slightly down. However German bund yields barely reacted and peripheral bond yield spreads are slightly higher. Meanwhile sterling moved higher Monday, recouping losses having fallen following Theresa May’s Brexit speech on Friday.
In a note from the BlackRock Investment Institute, the asset manager says it prefers European equities over government bonds and credit driven by above-trend economic expansion and a steady earnings outlook.
“Companies with much of their cost base overseas should have some cover against a strong euro in the short term, we believe. We see scope for the US dollar to regain some ground against the euro as the Fed presses ahead with policy normalization and US inflation looks ripe for a rebound. We believe core inflation in the eurozone is likely to stay muted, keeping the European Central Bank accommodative.”