Surprising decision

Following the string of election losses and declining polls, Merkel has somewhat surprisingly taken the decision to step down as head of the CDU but remain chancellor until her term ends in 2021. While in the past she had ruled out giving up the party’s leadership while remaining chancellor, the pressure even within her own party had probably become overwhelming, with the chances of a competitor winning against her in the race for the party’s leadership in December had increased significantly.

While Merkel has had her merits in steering the country through the crisis and global political turmoil, in my opinion there has been a stalemate in terms of reforms for a few years now. In fact, the Agenda 2010 of the Social Democratic Party and the Greens was the last significant reform. It turned the economy from the sick man of Europe to a growth leader and is still beneficial today.

While other countries are reforming and cutting taxes, Germany sits on the sidelines. Despite record tax income and a solid household budget (there’s a good chance the country will achieve the 60 per cent Maastricht criterium this year), the country is increasingly at risk of losing competitiveness. Therefore, an end to the wait-and-see politics could be a big opportunity and a positive factor.

Pro-Europe candidates

It will be important to see who will be elected to head the CDU as this person will also be the prime candidate to strive for the chancellorship at the next elections.

Three candidates have the best chance to succeed. There is Merkel favourite Annegret Kramp Karrenbauer, currently general secretary, who would stand for a continuation of the current policies. Then there is Jens Spahn, who is popular among the conservative wing and currently health minister. Finally and perhaps surprisingly Friedrich Merz is apparently also willing to enter the race - he was parliamentary party leader/whip until Merkel forced him out. Currently a lawyer, he is also head of the supervisory board of Blackrock Germany.

Of the candidates, Merz would be the most business friendly. For instance, he had asked for a significant tax cuts and business reforms before he was ousted. However, the other two will have better chances. All of them can be expected to be pro-Europe and at least continue the current politics if not improve and potentially a new face will help to regain voter support.

Market opportunities

As a result, overall I expect consequences for the markets to be small and positive, if there are any at all. Even if Merkel were to resign as chancellor early, or the SPD were to trigger new elections and a change in government, I would expect any new government to still be dominated by the parties sharing common values such as pro Europe, pro Euro, pro NATO and pro UN.

German companies are dynamic and have proven to be very successful in adapting to different, and sometimes very challenging, conditions. This is evidenced by the globally above-average earnings trend over the past 20 years which contained periods of significant headwinds such as strong raw material price hikes, a weak consumer demand from 2000 to 2010 and Merkel’s tax hikes.

It will remain important to find and invest in companies which can sustainably achieve above average growth and return on invested capital in this environment. Particularly after the recent market volatility, there are many attractive investment opportunities in innovative and growing companies that do not need particular macro or political support.

Christian Von Engelbrechten

Christian Von Engelbrechten

Portfolio Manager