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Merkel worker?

Elections are looming in Germany on September 18 and polls suggest that Chancellor Gerhardt Schroeder could be replaced by Christian Democrat rival Angela Merkel. Merkel has radical plans so what would this mean for investors in Europe’s biggest economy?

Merkel, a former physics professor, is leading Schroeder’s Social Democrats by 12 per cent, with 43 per cent in the opinion polls. Commentators believe that, barring a dramatic reversal, Merkel’s success is assured.

Among Merkel’s proposed reforms are revamping labour regulations and the introduction of a 25 per cent flat rate of tax proposed by her finance expert Paul Kirchof. In a speech last week, Merkel said she wanted to turn Germany into “a land of opportunity” and she is being frequently compared with Margaret Thatcher.

Credit Suisse fund of funds manager Rob Burdett says he has seen a greater increase in German exposure by fund managers over recent months, with a number talking more about the importance of country allocation. He says that while Spain, Italy and Ireland have been the major beneficiaries of EU spending over the last four years, these countries have “been giving themselves fat pay rises” while Germany’s unit labour costs are now 30 per cent lower than these countries.

Burdett is enthusiastic about changes in the German economy which represents 15.7 per cent of the FTSE European excluding UK index. He has major holdings in two funds overweight in the region.

Philip Wolstencroft’s Artemis European growth has a 16.3 per cent German holding while Rod Marsden’s JOHCM continental European fund has 19.8 per cent.

Burdett says: “We have already seen some labour reforms with the threat to relocate by some major employers such as Deutsche Bank. The winds of change are blowing in the country and this has been a subject during campaigning for the election. This will be good for equity performance.”

Britannic European Alpha manager Oliver Russ is less enthusiastic. He has seen a warming in investor sentiment towards Germany in recent months but he feels that one of the reasons that voters are opposing Schroeder is because he has started introducing modest labour reforms.

He says he would be surprised if, after gaining power, Merkel finds the support to implement further reforms despite her rhetoric. There is a lot of talk about Germany but Russ says it is difficult to see this reflected in hard figures.

He says: “There is a certain amount of hope in the market that Merkel will get in and turn things round like the German Maggie Thatcher. Frightening though that prospect may be for some of us, from what I can tell, she is not. There is no doubt that the German economy is in dire need of reform but it has never been particularly friendly towards equity investors.”

Over the long term, New Star European investment manager Michal Bartek says victory for Merkel would put her CDU party in a reasonably strong position to implement labour reforms and this could be good for equity investors over five years or more. However, he says the low-spending German consumer is likely to dog equity performance in the short term, no matter who gets in.

Bartek says: “Those in employment in Germany now know that changes are necessary and some will lose their jobs. If elections end in a CDU victory, they will accelerate reforms and German consumers will fear even more for their jobs. There is no overnight solution.”

The task of building enthusiasm for German equities among UK investors falls to IFAs. SVM head of retail sales and marketing Mark Noble says that despite three years of exceptional performance in continental Europe, the market is by no means an easy one in which to gain retail money.

Noble says: “Irrespective of who wins, the Germans have accepted there has got to be significant structural reform which will benefit investment prospects. But IFAs like to see funds attracting a lot of money and in the short term, providers will have to wear out their shoe leather convincing advisers of the case to invest.”

John Scott and Partners research and investment manager Patrick Connolly says IFAs are unlikely to be making any short-term bets on Europe in the light of the German elections. His approach of strategic asset allocation generally gives clients a 50 per cent equity exposure, of which 6 per cent is for European equities, depending on their appetite for risk.

Connolly says: “As far as the German elections are concerned, we have our allocation in Europe and it is always a case of achieving the client’s long-term goals. I do not think advisers are going to be suddenly changing their exposure to Germany regardless of whether the election is next week, next year or was last week.”

Germany is an interesting long-term growth story and the more speculative investor is likely to show an interest in it on the basis that labour and tax reforms seem inevitable.

If she does win a mandate from the German people, Merkel will be in a better position than Schroeder to bring such reforms about although in the short term but we are not likely to see German equities sky-rocketing.


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The pace of change in the pension’s space has been little short of astonishing, and has left thousands of employers struggling to keep their pension policy compliant, and also on the right side of current best practice and governance. Many employers, and indeed many in the pensions industry itself, would like to see a period of no change during the next term of government. This would give all sides a chance to catch up and draw breath. 


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