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German election leaves investors braced for more spending

The purse strings have been loosened. No matter who heads Germany’s new government, it will stay the same. That’s the verdict from investors. After Finance Minister Olaf Scholz’s centre-left Social Democrats (SPD) narrowly defeated the ruling Christian Democratic bloc (CDU/CSU). Both parties will woo the Greens and the pro-business Free Democratic Party (FDP) to form a coalition. Based on the colors of the parties involved, a potential Social Democrat-led alliance has been dubbed the traffic light coalition.

All the other parties, except FDP have expressed some willingness to spend more flexibly. Anna Stupnytska, global macro economist at Fidelity International said that it seems that the Greens are going to be part of the coalition. So, whether it’s a Jamaica or a traffic light coalition, that means more expansionary fiscal policy. She saw the traffic light option of the Social Democrats, Greens and the FDP as the most positive option for markets. Higher spending from this coalition will provide a bigger boost to public investments.

The leading period of CDU is characterized initially by stringent austerity both at home and across the euro zone. The critics says that it has depressed public investments. Last year’s spending burst was financed with record new borrowing of 130 billion euros. Thomas Kruse, chief investment officer for Germany at Amundi, said that an SPD-led coalition could unleash more government spending. But a conservative-led grouping was likely to stimulate private sector investment via tax cuts. The Greens will be key, and the Kruse is particularly seeking opportunities in companies.

There could also be sticking points. Marco Willner, head of investment strategy at NN Investment Partners said that the outcome of the negotiations is likely to lead to movements in utilities and property shares. The spending increases are unlikely to play out too hard. The yields have risen in recent weeks. The FDP and CDU want to return to strict EU budget rules. Still, an SPD/Green-led coalition will exert less pressure on EU countries. This is to lower their budget deficits quickly, as per the SEB economists. German voters’ rejection of the Left Party as well as the far-right AfD is seen as a good sign for Europe. Hans-Joerg Naumer, senior investment strategist at Allianz Global Investors said that whatever the coalition will be, it will be euro-friendly and what’s important is that Germany will remain a reliable partner for Europe.

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