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Merkel wins the German election

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

Angela Merkel will serve a fourth term as German chancellor following her federal election win, but now faces coalition talks to build a government. We assess how markets and currencies reacted to the result and what it means for investors.

Click to toggle accordion What you'll learn:

What Merkel’s coalition options are.

How markets and currencies responded to the election result.

Why it’s important for investors to remain focused on their long-term objectives.

Angela Merkel, leader of the Christian Democratic Union (CDU) party, has won a fourth term as German chancellor in the federal election held on 24 September, securing around 33% of the vote.

However, her conventional coalition options have been removed by the success of the populist far-right Alternative for Germany (AfD), which won nearly 13% of the vote, and is on course to take more than 80 seats in the Bundestag.1 It is the first time a far-right party will have held seats in parliament since 1961.

The centre-left SPD, which scored 20.5% of the vote, has refused to join Merkel in a coalition, which means she must now attempt to secure a governing majority with the various minority parties.

A so-called “Jamaica” coalition between the CDU with the Free Democrats and Greens could be difficult to achieve given their ideological differences.2 The term Jamaica alludes to the respective parties’ colours of black, yellow and green.

Addressing Germany after the win, Merkel said she had hoped for a “better result” and that she would listen to the “concerns, worries and anxieties” of those who had voted for the AfD.3

Merkel first became Chancellor in 2005. Germany has only had eight Chancellors since the end of the Second World War. In contrast, Britain has had 14 prime ministers over the same period, whilst the US has had 13 presidents.4

How markets responded to Merkel’s election win

European stocks dipped slightly immediately following the election result, amid concerns surrounding the months of coalition talks that will now follow.5

Markets dislike uncertainty, so a clearer result may have had a more positive effect.

Merkel is a strong supporter of the European Union, with a focus on strengthening European co-operation. However, some commentators anticipate that as the chancellor will now be focused on trying to sort out a three-way coalition, this could prevent her from committing to further euro area integration. It also creates greater uncertainty on the role Germany will play in the UK’s Brexit negotiations.6

The euro also slipped following the result, having also been dented by French President Macron’s struggle in Senate elections, where his Republic on the Move (LREM) party ended up securing 23 senators, as opposed to the 40-50 he’d hoped to win. His party will now have to rely on alliances with lawmakers from other parties to support the government on a case by case basis.7

While the euro faltered, sterling chalked up gains, putting the FTSE 100 under pressure. Share prices often fall when the pound strengthens, as foreign profits are reduced when converted back into sterling. In contrast, sterling weakness benefits companies which derive their income overseas when their earnings are converted back into sterling.

For investors in Europe, this means that when sterling is stronger, your pounds will buy you more euro-denominated investments. However, if you already have overseas investments, higher exchange rates can work against, as this will reduce their value to you.

Only time will tell what the longer-term impact of the election will be, with markets waiting to see the outcome of coalition talks over the next few months.

The outlook for the German economy remains positive, however. Earlier this month, the industry association BDI raised its forecast, predicting German economic growth of more than 2% this year on a calendar adjusted basis.8

However, according to the Ifo Institute, one of the leading economic research institutes in Europe, German business confidence weakened unexpectedly for a second month in September, although it remains near a record high.9

What next for investors in European equities?

Investors should try to remain focused on their long-term investment objectives, particularly as it is not yet clear when a coalition will be agreed, and exactly what form it will take.

It is impossible to predict for certain which way any stock market index or currency will move next, and politics is not the only factor which can sway markets. Many other things such as inflation, deflation and company events can also influence how markets and currencies move.

One way to help minimise the likelihood of your portfolio value being damaged by falls in one particular area is to ensure it is diversified across several different asset classes and currencies, and across a range of geographical areas.

However, no matter what steps you take to try to protect yourself from uncertainty or otherwise, investments’ values can still fall and you might get back less than you invest. Past performance is not a reliable indicator of future performance.

Bear in mind that this article is for information purposes only. If you’re unsure, seek independent financial advice.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

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