Snap German Vote Would Likely Boost Stocks, Citi’s Manthey Says
(Bloomberg) -- Stock markets in Europe are likely to find some relief from a snap election call in Germany this week as it could prompt corporate tax cuts and deregulation, according to Citigroup Inc. strategists.
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Germany’s benchmark DAX Index outperformed Thursday after Chancellor Olaf Scholz, a Social Democrat, ended his three-party alliance with the Greens and fiscally conservative Free Democrats. While the gauge was caught up in a global market risk-off day on Friday, investors are optimistic that early elections next year will bring a much needed economic boost.
While new coalition partners are still undetermined, Citigroup strategist Beata Manthey said a potential corporate tax cut to 25% from 30% would boost earnings-per-share by about 2% for DAX members and 3% for constituents of the mid-cap MDAX Index.
“These latest political developments are likely positive for German equities and the overall European market,” Manthey wrote in a note.
European stocks have come under pressure in recent weeks from an underwhelming corporate earnings season, a weak economy in key market China and worries about potential tariffs after a US presidential win for Donald Trump.
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Scholz is trying to stave off a fresh election until March to give his beleaguered party a chance to recover. Opposition leader Friedrich Merz and his conservative CDU/CSU alliance, which has a big lead in polls, want the vote to happen sooner.
While political uncertainty usually tends to hurt investor sentiment, the outlook is different for Germany as corporates there are seen as having suffered under the coalition. Sectors including automakers, banks, defense, energy and yield-sensitive real estate have been hit hard.
Barclays Plc strategists also called the early election a “silver lining.”
“Germany faces deep structural problems, which may require public investment but also important supply side reforms,” strategist Emmanuel Cau said. “Unlike some of the other countries in the region, they do have fiscal space. In that regard, we think the snap poll may be seen as a positive catalyst for the region.”
Over at JPMorgan Chase & Co., economists remain skeptical about the outlook as they see a high probability of a lack of majority in the new government.
Analysts at the bank said while any impact of weaker loan growth on banks including Deutsche Bank AG and Commerzbank AG should be “manageable,” they’re taking “a more cautious approach” to provisions than company guidance for 2025.
They also warned that the CDU has taken a more negative view with respect to Unicredit SpA’s stake build-up in Commerzbank.
The defense sector remains “very attractive,” but it could face risks from a less pro-defense government, while Deutsche Lufthansa AG and Deutsche Post AG have exposure to the German market and could see some impact from weaker consumer or business confidence, the JPMorgan analysts said.
--With assistance from Henry Ren, Farah Elbahrawy, Sagarika Jaisinghani and Jan-Patrick Barnert.
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