Wealth and asset managers consider the election results of 60 million Germans who voted in 299 constituencies across 16 states.

Germany's federal election at the weekend produced no overall majority for a single party but the Christian Democrats (CDU)/Christian Social Union (CSU) achieved the largest vote haul in a snap election called last year after the former coalition had lost a confidence vote. Wealth managers reckon that, assuming a coalition is formed with the left-leaning Social Democrats (SPD), this could see a more business-friendly administration than before.

Results gave the CDU/CSU 28.5 per cent of the vote, made it the largest party; the hard-right Alliance Fur Deutscheland obtained 20.8 per cent of the vote, followed by the Social Democrats, at 16.41 per cent, and the Greens, at 11.6 per cent, and the leftwing Die Linke party, at 8.77 per cent.

The results appear to be reassuring for wealth managers.

Investors will welcome the relatively market-friendly outcome of German elections, according to Ben Ritchie, head of developed market equities, at investment manager abrdn. Friedrich Merz will lead the next government from the centre-right.

“With the SPD and CDU/CSU combined having over 50 per cent of the seats in parliament a two-party governing coalition should be able to be formed, making for both easier bilateral negotiations and most likely a more-market friendly government without the Greens,” Ritchie said. “Importantly it also takes away some low probability, high impact downside scenarios, such as much stronger outcomes for the AfD or the inability of mainstream parties to form a majority government.”

The result does make debt brake reform seem unlikely, with mainstream parties unable to muster the necessary two-thirds of seats, albeit a possibility depending on the co-operation of the Left.

Alex Everett, investment manager at nominal rates team at abrdn highlighted how fixed income markets will focus on two questions: can Germany spend and is Merz a European leader? “Pre-election noises suggest Merz is up to the leadership challenge (despite lack of experience), but the jury is still out on spending,” he said.

Merz has pledged to act quickly to address Germany’s lack of growth – an announcement of investment in German industry will be a high priority. However, this may be funded by a reduction in benefits for migrants, serving to placate the fiscal conservatives in the CDU/CSU and in recognition of the strong performance by the AfD.

“More spending is expected for defence, especially following Merz’s surprisingly blunt comments in support of European security absent the US. However, the parliamentary makeup will limit the impact on German issuance – the AfD-Linke blocking minority is expected to derail proposals to amend the debt brake,” Everett continued. Instead, increased defence spending via off-balance sheet vehicles looks feasible, and there may be further budget support for joint EU investment.

Merz’s pro-European and pro-business stance should be incrementally positive for the growth outlook. Though beleaguered, Germany remains Europe’s principal economy, so even a modest sentiment boost can have wider impacts. We expect continued curve steepening, and a broadly benign environment for European country spreads, absent further geopolitical shocks.

“Merz will inherit a beleaguered economic model and a variety of geopolitical challenges. His policy platform is likely to focus on tax cuts and deregulation, energy costs and security of supply, and European defence posture,” Lizzy Galbraith, political economist, abrdn added. He used his victory speech to pledge to “strengthen Europe as quickly as possible so…we can achieve independence from the USA.” In the wake of the initial result, European Council president Alberto Costa announced plans for an extraordinary meeting of leaders in Brussels on 6 March, focused on “Ukraine and defence.”

However, constitutional reform of the debt brake will be complicated by a potential one-thirds blocking minority in the Bundestag, with the Alternative for Germany (AfD) and Die Linke collectively securing 215 seats.

“Far-right parties performed strongly, with AfD achieving its best result, yet. The question now is whether this signals a lasting shift ahead of the next election as they continue to gain momentum,” David Zahn, head of European fixed income at Franklin Templeton, added.

“The CDU performed as expected and is set to lead a coalition with SPD. Depending on the results, they may seek support from another party if smaller parties surpass the 5 per cent threshold,” Zahn continued.

“This is a likely continuation of the new German government’s approach. However, Matz has shifted focus to defence, emphasising NATO and advocating for a European-led solution. Market implications should be limited, as a change to the debt brake remains possible but it is unlikely to materialise before next year, if not later,” Zahn said,

“We continue to favour German bunds and see scope for the 10-year yield to trade closer to 2.25 per cent by year end given the degree of fiscal hopes baked in and downside growth risks,” Nuveen’s Laura Cooper, head of macro credit and global investment strategist, continued. “Euro upside could similarly be limited given the trifecta of benign tariffs, German stimulus hopes, and a Russia-Ukraine peace accord, that have driven the recent rally, still ostensibly on shaky ground.”