I know that the result of the German general election has been known for over a week but this is the first opportunity I have had to comment on what is arguably the most important development in Europe this year.
Having said that, the final outcome was hardly a surprise but at least any potential uncertainty has been swept aside and with Frau Merkel’s party falling short of an overall majority, it looks as though things will be much the same as before.
With “Mutti” – or Mummy – as Angela Merkel is popularly known, starting a third term in what must be considered the most important job in Europe, it is difficult to imagine her changing tack on the important issues. Austerity seems likely to remain for those nations that require German help, though the likely partners in the ruling coalition are believed to be less keen on maintaining such a tough stance.
Fortunately, signs are building that Europe is at last turning the economic corner, so with a little luck the screws can be loosened a little to everyone’s relief. We are not out of the woods yet, but somehow we have muddled through without the single currency zone imploding. And Germany has emerged in a stronger position as a consequence – a point that was not lost on the German electorate as they voted for more of the same.
Europe could be an interesting play for investors. Much of the US recovery is already priced in to markets, while the debt ceiling there is rearing its ugly head again.
Mind you, Americans must be used by now to the threat of the plug being pulled on government expenditure as, since 1996, a continuing resolution from Congress has been needed to allow the Federal government to operate in all but one year. The uncertainty these negotiations over debt creates has been weighing on sentiment, though.
European shares, while above the depths plumbed at the height of the sovereign debt crisis, still look good value. Much depends on the line continuing to be held over keeping the single currency zone intact, but last week’s election result does make that look increasingly possible. With some form of Europe wide banking union also coming that little bit closer, it could be time to start looking at the Eurozone as a recovery play.
However, negotiations between the victorious Christian Democrats and their likely coalition partners, the opposition Social Democrats, are likely to be tricky. The Social Democrats have been here before and were less than delighted with the outcome. But with the Free Democrats failing to qualify for seats in the parliament, a new partner must be found and Merkel’s Christian Democrats are in a more powerful position than when they last went to bed with the Social Democrats.
Politics, as always, can muddy the waters when it comes to formulating an investment strategy, but the fact remains that, even though the result was expected, a degree of certainty can now be factored into what might happen in the single currency zone. With emerging markets still under a cloud as the ending of monetary easing in the US draws closer – as it must – investors may well look to Europe as a safer haven than once it appeared.
But it is worth reflecting that European markets have had little correlation recently. While this should come as no surprise, given the varied experience of continental European nations on the economic front, it means choosing how and where to invest is a tougher prospect than in, say, the US.
The options appear to lie between serious stockpicking or finding the fund that appears to have established the right strategy. An opportunity, sure, but not necessarily an easy one.
Brian Tora is an associate with investment managers JM Finn & Co