By Victor Reklaitis, MarketWatch
Imagine having three children — two who are drama queens, and one who is calm and mature, as if there were another grownup in the family.
The first two might represent recent United Kingdom and French elections that sparked outsize moves in markets. Meanwhile, Germany’s upcoming ballot plays the part of the “strong and stable” child — to borrow a Tory campaign slogan that failed to resonate with U.K. voters.
German Chancellor Angela Merkel looks set to cruise to her fourth term, and the main question has involved which parties will team up with her Christian Democrats to form a governing coalition. Yet investors are still keeping an eye on the Sept. 24 federal election in Europe’s largest economy, says Seema Shah, a London-based strategist for Principal Global Investors. It could provide investing opportunities, even though it doesn’t look like a big market mover, she says.
The June vote in Europe’s second-biggest economy was a different story, as U.K. Prime Minister Theresa May’s gamble to secure a larger Conservative majority backfired, sparking a slump in the pound for several sessions. That came a year after the Brits voted to leave the European Union, shaking up markets worldwide. And voters in France, the No. 3 economy, triggered a global rally for stocks in April, when they gave now-President Emmanuel Macron a victory in the election’s first round.
“In the past year, the elections you’ve had in Europe — as well as in the U.S. — have gotten a lot of market attention, with at least before-the-election speculation that there could be a major change in policies,” Shah says.
On the other hand, neither Merkel’s Christian Democrats nor the Martin Schulz–led Social Democrats, the party polling a distant second, appear likely to alter the status quo in foreign or domestic policies.
However, there could be a buying opportunity in European stocks if Germany’s election campaign, described as “bland” and “boring” so far by the media, somehow starts to put traders on edge in its final week.
“If you do see any widening in spreads on Bund yields, or if there is some market concern growing about the German election, that’s an opportunity to get in, because this should not have a big impact,” Shah says.
The German Election Explained
German voters head to the polls this Sunday in an election that determines whether Chancellor Angela Merkel remains at the helm of Europe’s biggest economic power. WSJ's Niki Blasina explains how the election will be won and why the race for third place is all important.
Investors should buy the dips in European equities because more gains are coming, thanks to a favorable backdrop, she argues. The Stoxx Europe 600 /zigman2/quotes/210599654/delayed XX:SXXP +0.04% , Germany’s DAX /zigman2/quotes/210597999/delayed DX:DAX -0.45% and other European indexes have been holding below 2017 peaks hit in May and June, but fresh highs will arrive in due course, says Shah.
She predicts that the European Central Bank will gradually taper its bond-buying program, a key stimulus effort, over nine to 12 months, with that process starting early next year. She forecasts no interest-rate hikes until 2019 and sees ECB President Mario Draghi possibly talking down the rallying euro, which has been a headwind for shares of European exporters.