Greener Post-Election Germany Likely, but Limited Fixed Income Impact
The German election results are in, and the Social Democratic Party (SPD) received the largest share of the vote for parliamentary seats—25.7%—beating the Christian Democratic Union (CDU) party of outgoing Chancellor Angela Merkel and its coalition partner the Christian Social Union (CSU), which received 24.1%. The Green Party received 14.8% of the vote, and the Liberal Free Democratic Party (FDP) received 11.5%. Germany’s government is typically comprised of a coalition, and a new one will take some time to form—in 2017, the process took more than five months. Merkel will remain in her current position until that happens.
Now, the real work begins in terms of what type of coalition there will be. The Green Party wants to be part of the coalition, and as the name implies, its aim is more greening of the economy—which requires more spending to finance. Meanwhile, the FDP tends to be a little bit more fiscally austere, which will probably be a countering force. That probably means we will see a modest fiscal expansion and probably more greening of the German economy and infrastructure, which is seen as positive. The far left won’t be part of the government, so there will be spending, but a big spending budget which would potentially upset the bond market won’t likely happen.
Having a three-way coalition is inherently less stable than just two parties as there may be competing priorities and opinions that make it more difficult to enact policy, particularly new initiatives. And, it could mean the new chancellor will not be as strong as previous ones. What’s interesting to note is that we have seen a return of a more centrist leaning in Germany—as the far left and far right didn’t do as well as in prior years. Whether that becomes a pattern elsewhere in the world remains to be seen.
As far as the Bund market and German interest rates, the market impact of the results looks limited, but if we do have a European crisis or geopolitical crisis in the future, vulnerability may surface given a lack of a strong leader to keep Europe together, leading to potential market volatility. We could see more power shift to Brussels and in that sense, the European Union should remain in a good position, but we could see more bickering than usual without that strong leadership force out of Germany.
For the near term, the European Central Bank’s actions are the greater focus for the bond market, so that’s what we are keeping an eye on for now.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in lower-rated bonds include higher risk of default and loss of principal. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.