European Espresso: Economic revival and defence post-German elections

We had the German federal elections on Sunday. Now that the dust has settled and the results are in, I wanted to give you our take of what we feel this means for European equity markets going forward.

Now, first to recap, we had the highest voter turnout since the reunification of Germany in 1990, and unfortunately it continued a trend that we have seen in other European countries of a birfurcation – a pushing of the vote – to the left and the right extremes, and a weakening of the political middle.

Now still there were enough votes left for the political centre to form a coalition government, which will likely happen by Easter, but unfortunately the extremist parties together on both ends of the spectrum have now gained a blocking minority of more than one-third of the seats in Parliament, to hinder any constitutional changes.

Now let’s take a step back. Why would constitutional changes be so important? Well Europe has two big challenges. One – it’s been faced with an economic malaise for the last three years – stagnation. And on the other hand, we are increasingly being challenged in our role in the world in terms of geopolitics, being caught up in the clash between the US and China, and the new alliances that the US is forming to counter China. And Europe’s role has been weakening in that. Europe needs to stand on its own two feet much more going forward, in terms of security and defence policy.

So let’s start with economics and how the new German government can improve the situation. First of all, the new Chancellor Merz has historically always stood for an agenda of deregulation, de-bureaucratisation, simplification of the tax code, and hopefully stimulating economic growth via the easing of regulation. There is also potential for increased structural reforms, and also maybe infrastructure investments.

Now, on the defence side, what we think there is, there are various avenues, maybe not easy, maybe [involving] some trickery, in getting around the new hurdle in Parliament, but there are avenues available for the new government to also push a much higher defence spending going forward. And so, we feel the same is going on at the European level. We see various pieces of evidence there from the European Central Bank, European Commission, both working with significant regulatory easing agendas, in terms of defence spending in various European capitals, potentially on the European level.

And so far, really, the German election has been another milestone, another sort of catalyst, that has passed successfully for the continuation of our big investment themes, which continue to be banks and defence sector.

Glossary:

Economic malaise: Referring here to an economy that is experiencing low growth (stagnant) or recession.

Stagnation: A period of little or no growth in an economy, commonly defined as growth of less than 2-3% annually, as measured by gross domestic product (GDP).