What’s the outlook for Germany as it heads to the polls?

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Angela Merkel is widely anticipated to win a fourth term at this weekend’s German elections, although some coalition options are likely to be viewed more market positive than others.

Fidelity International global economist Anna Stupnytska says the Christian Democrats are unlikely to win a majority.

“From a markets perspective, the German elections are likely to be a non-event, though protracted coalition negotiations would be negative. The final coalition might swing the market sentiment, with the CDU/SPD outcome being the most positive for the future of Europe.”

However, that could see the AfD as the largest party in opposition.

An alternative coalition would see the CDU reach a deal with the Liberals, also known as the Free Democrats or FDP, which would leave the SPD, led by Martin Schulz, as the main opposition.

Heartwood Investment Management investment manager Jaisal Pastakia says the Liberals’ pro-business agenda makes them a morel natural coalition partner for Merkel, but that they may not have the numbers to form a government and would therefore need the Greens.

Pastakia says those parties have not ruled out an alliance, but it could be difficult to manage their different agendas. The Liberals also take a less integrationist view on Europe.

Regardless of the coalition, Germany is expected to see tax reform with the three main parties all proposing a phasing-out of a tax introduced in 1991 to pay for German reunification. Combined with tax cuts for middle income earners reform is expected to boost households by €25bn.

JPMorgan European Investment Trust co-manager Alexander Fitzalan Howard has more than 10 per cent in Germany and says its economy remains in good shape, on track to grow around 2 per cent this year.

“Employment is strong. The current account is in surplus. Bond yields remain low and companies can finance themselves cheaply,” Fitzalan Howard says. “Corporate earnings are recovering along with the rest of Europe. So far there is little sign of inflation accelerating.

“However, at the margin, the recent strength in the Euro is a negative for Germany’s export orientated economy and it is perceived as being vulnerable to any slowdown in China.”

BlackRock Greater Europe Investment Trust co-manager Stefan Gries warns Germany is also the European country most exposed to the auto sector.

Like-for-like vehicle sales have been down over 15 per cent year-on-year in the UK, and 6 per cent in the US to end of July. “China, where car sales have increased almost 5-fold since 2006, remains more resilient, however consumer preference is for domestically made vehicles rather than German engineering.”

However, Gries notes German companies on the whole also boast healthier balance sheets compared to the rest of the euro area, with German corporate debt ratio stands over 40 per cent lower than the euro area average.