Germany’s incoming chancellor wants to achieve “independence” from the US. Investors in German stocks should be so lucky.
The result of Sunday’s election should be incrementally positive for the country’s stock market, reflected in the 0.6 per cent increase in the Dax index on Monday. But with most large companies relying on international trade for the vast majority of their revenue, there will remain a Donald Trump-shaped shadow hanging over the market.
When investors size up elections, whatever the country, certain rules tend to hold. The most basic one: uncertainty is bad. Germany’s likely result — a two-party coalition between the Christian Democratic Union and Social Democrats — at least ticks that box.
While the parties disagree on many things, both want to increase defence spending and encourage business investment. Good news for Germany’s Dax, whose 40 stocks are more heavily weighted to cyclical sectors such as industrials compared with comparable benchmarks in the US or the rest of Europe. Any boost to economic growth after two years of contraction in their home market should be welcomed.
In the US, investors tend to like political deadlock, since it makes radical changes less likely. Germany, though, could use some decisive action, such as a reform of the restrictive “debt brake” that limits government borrowing. A strong showing for the far-right Alternative for Germany and leftwing Die Linke parties will make that more difficult, but not impossible.
At first glance, it may look like much of the improved outlook is already baked in — the Dax has risen more than a quarter over the past 12 months, further than either the Europe-wide Stoxx 600 or the S&P 500. But almost half of the index’s advance was driven by technology companies, according to Citigroup analysts. Tech group SAP is trading at more than 40 times forward earnings, but the index overall is trading at just 14 times, according to S&P Capital IQ.
For most German companies, removing the threat of a global trade war would be far more impactful than the local election result. Less than 20 per cent of revenue across the large-cap index is generated within Germany. The mid-cap Mdax index is slightly more domestic, but still gets the vast majority of its turnover from elsewhere.
There has been cautious optimism since Trump came into office last month that Europe will avoid the worst-case scenario, but valuations of the most at-risk sectors like automobiles are still in the gutter. Volkswagen is currently valued at less than 5 times expected earnings, with BMW and Mercedes-Benz only a little better. It will take more positive news for them to recover.
Trump’s first reaction to the German vote seemed enthusiastic — he called it a “great day for Germany”. What’s good for Germany should in theory be good for German stocks. But the deciding vote on where valuations go next will be cast on the other side of the Atlantic.
nicholas.megaw@ft.com