Some key aspects of this are compatible with the previous German stance, but the impact of Sunday’s election result and the increased support for the AfD and the strong position of the FDP could threaten Merkel’s ability to co-operate. Indeed, other concerns, such as about migration, as well as the cost of bailouts associated with euro membership, could shape German politics for years to come.
It remains to be seen what the impact is for the UK and the forthcoming Brexit negotiations. In particular, it will be interesting to see whether the German election outcome tilts things in favour of the business lobby. They have most to lose from no deal with the UK, a huge export market, and are known to want a deal. Indeed, business groups across France and Italy may likewise feel empowered, particularly in the light of the UK Prime Minister’s more conciliatory tone in her Florence speech and proposal for a two year transition deal.
This week European equity markets have remained unperturbed by the election results, although the euro has weakened slightly versus major currencies after a period of strength this year. Nevertheless, markets do not like uncertainty and will thus be watching closely to see how this might impact future policy. Also, we have an imminent unofficial referendum in Catalonia and it won’t be long until the Italian presidential election rolls into view. Recent developments are unlikely to alter ECB policy, which is accommodative and supportive of economic growth and financial assets. At Netwealth, we prefer European equities to US equities. We think the current economic outlook will continue to support European earnings growth, whilst on a relative basis, valuation and monetary policy also remain supportive. Naturally, we continue to monitor whether the recent political developments will change our allocation outlook.