Stock Market Reacts Positively to Bundestag Election Results

The recent Bundestag elections appear to be steering Germany towards a large coalition led by the CDU, with the SPD expected to play a secondary role. Analysts from Deutsche Bank expressed mixed feelings about this development, suggesting that the Union's limited coalition options could hinder its ability to initiate significant political reforms, such as tax reforms. However, they also noted that a two-party coalition led by a strong Union could be beneficial for German companies, as it would likely reduce political stagnation and uncertainty compared to the previous government.

Investors on the stock market reacted positively in November to the conclusion of the Ampel coalition, expressing hopes that a new government would spark a sense of renewal. Joachim Schallmayer, head of capital markets and strategy at Deka-Bank, remarked that the rapid stock price increases over the past months reflect expectations for swift political changes in Europe. There is anticipation for substantial, debt-financed investment programs in both Germany and Europe, which could positively influence the DAX for years to come. Financial markets are hopeful that the new government will ease fiscal constraints and utilize funds to stimulate the economy, though achieving this will require a two-thirds majority in parliament--a challenging prospect for parties open to changing the debt brake, as the Union, SPD, and Greens do not have sufficient votes and would need to negotiate with the Left party.

The MDAX, which serves as a more accurate reflection of the German economy, has remained stagnant. The pressing question now is how long it will take to form a new government. Schallmayer cautioned that initial disappointments might arise due to a potentially difficult coalition formation. Much will depend on how quickly the election winner, Friedrich Merz of the CDU, is able to assemble a coalition. Protracted negotiations could dampen investor expectations and lead to setbacks in the stock market.

Business representatives have urged political leaders to expedite the formation of a government, emphasizing the urgent need for a capable and proactive administration. Christian Sewing, CEO of Deutsche Bank and president of the Association of German Banks, stated that Germany is facing significant challenges and requires a fresh start with fundamental reforms.

Jan Viebig, chief strategist at Oddo BHF, noted that the worst-case scenario for election results would have been a distribution of seats that fails to provide a clear majority for the future government. Nevertheless, reviving the growth process would simplify many issues, as Germany still possesses strong foundations, including advanced research, technological expertise, skilled labor, entrepreneurship, global presence, and financial strength.

Interestingly, the recent strong performance of the DAX has surprised many, given the struggles of the German economy. This success is largely attributed to the fact that the 40 companies listed in the DAX generate about two-thirds of their revenue from international markets, benefiting from a robust global economy. In contrast, the 50 companies in the MDAX are more closely tied to the domestic economy, which has resulted in minimal movement over the past twelve months, while the DAX has surged by 28 percent.