European equities: Back to politics, navigating these challenges with active investing

In September, Germany held state elections in two eastern states, with the far-right party winning its first regional election.  Initial reactions by European equity markets were muted.

Although these results did not produce wild swings in the market, the political backdrop in Germany is complex. To navigate any challenges that may arise as a result, we believe active investing is key.

Germany’s Regional Elections: AfD Gains Momentum

For many, September marks a return to school, but for Europe, it also signifies a renewed focus on political developments, with Germany making headlines. The states of Thuringia and Saxony held regional parliamentary elections in which the Alternative for Germany (AfD), the far-right party, gained considerable momentum.

In Thuringia, the AfD's led the polls with 33% share of the vote, reflecting a significant increase in its influence. In Saxony, there was substantial support for the AfD party as they come in second with 31%.

Despite these results and the potential to cause alarm, it is important to view them within a broader context. These results were held in only two of Germany’s 16 states, and both of which are relatively less populous. 

Furthermore, while they may take a while to form, we expect coalitions in both Thuringia and Saxony led by the CDU, including the SPD and far left new found party BSW, preventing the AfD from holding a governing position. The growing influence of the BSW party will be another factor driving these other relatively more centrist political groups together.

Impact on markets and investment strategy

From an equity perspective, the results of the Thuringia and Saxony elections align with expectations. The DAX stock index had a relatively muted response (-19bps) following the announcement.

However, the fragmented nature of German politics could pose challenges for future decision-making and policy formulation. In our view this situation highlights the importance of active investment strategies in Europe.

What we can learn from active investing from the French election

The opportunity around active investing was highlighted earlier this summer when Macron announced snap elections in France. On the European Equities desk, we successfully traded around the election news – either by  adjusting existing positions or initiating new ones during periods of significant share price weakness.

However, France is now approaching another key turning point with the appointment of Michel Barnier as new Prime Minister. Barnier is a member of right-wing party Les Républicains. He has held several ministerial posts including Minister of European Affairs (1995-1997) and Foreign Affairs (2004-2005) under Presidents François Mitterrand, Jacques Chirac and Nicolas Sarkozy.

He has extensive government experience and is considered a clever negotiator and most notably was also the EU’s chief Brexit negotiator. His appointment marks the end of nearly two months of governance by a caretaker administration. The resolution of this political uncertainty, particularly with a centrist figure, is likely to reassure markets and provide long-term stability for investors.

Why we think active investing is key in Europe's evolving market

Europe’s political landscape is complex, making active investing so key. European growth may not be linear and could be steady, but it has accelerated more quickly than that of the US since Covid (see chart below)  Additionally, the equity  market is considerably cheaper (13.5x 12m forward Price to Earnings Ratio vs the US at 21.3x).

Balance sheets remain strong, share buybacks provide support, and rising wages coupled with decreasing costs mean consumers have more disposable income. At the manufacturing level, de-stocking is at least over, and while the credit cycle remains tight, demand is increasing. Lower interest rates should be supportive to the economy.

It might be back to politics for some, but for our strategy it’s back to basic like these on which investors should concentrate on these fundamental aspects.