How will different investment funds win or lose from the outcome of the forthcoming German national elections, scheduled for 22 September? FE Trustnet has analysed three potential outcomes and explores what the investment impact will be.

How will different investment funds win or lose from the outcome of the forthcoming German national elections, scheduled for 22 September? FE Trustnet has analysed three potential outcomes and explores what the investment impact will be. The editors are pleased to carry this article on this publication but stress that they do not necessarily endorse all the opinions expressed and invite readers to respond.

Scenario One: Status Quo

In this scenario, [Chancellor] Angela Merkel’s popularity allows her to continue in the current Centre Right coalition, with her own party the Christian Democratic Union (CDU) together with its sister party the Christian Social Union (CSU), and the like-minded Free Democratic Party (FDP).

Considering this has been the ruling coalition since 2009, such a government could be expected to continue with its tried and tested strategy for solving eurozone problems. This has entailed Germany sending bail-out loans to peripheral members with stiff austerity commandments attached, and it has suffered criticism due to a perceived lack of growth stimulus for these stagnant economies.

Likely winners of scenario One would be funds with high exposure to Germany, since Merkel seems reluctant to allow any substantial capital outflows from national coffers and has seen a golden age for German manufacturing flourish under her stewardship. Baring German Growth Fund has 97.8 per cent of its funds invested in Germany, but those seeking more diversification might prefer IFDS’ IM Argonaut European Alpha Fund with has 32.19 per cent exposure to Germany or Neptune’s European Opportunities Fund (25.30 per cent) - all of these funds are run by managers which have achieved an FE Alpha Manager Rating, a system used to distinguish fund managers who have consistently performed well over the longer term.

A loser from Merkel’s current policies appears to be Portugal, which was one of the most zealous adopters of austerity measures and which now finds itself mired in low growth and the resulting recent political turmoil. A search on FE Trustnet reveals that the only fund with over 4 per cent exposure to Portugal is Legg Mason’s Income Optimiser (4.29 per cent).

Scenario Two: Grand Coalition

The FDP has been struggling in the polls of late, meaning it might not be able to contribute enough votes to preserve the current coalition. In such an eventuality, Merkel might be forced to reach out to the Social Democrat Party (SPD), her traditional opponents on the centre left, and reform the “Grand Coalition” which governed Germany between 2005 and 2009.

This scenario is favoured by many of Germany’s peers in the eurozone, particularly France, who suspect that a Grand Coalition might prove more growth-oriented and generous in its bail outs, with less of a focus on austerity.

With this in mind, likely winners from scenario 2 could be the peripheral countries which have been finding growth so difficult to achieve since 2008. With more substantial German backing, investments in Greece, Italy, Spain, Portugal, Cyprus and Ireland might begin to look more attractive to the markets, and thus recover some of the ground they have lost over the last few years.  Examples of funds to play this theme include Invesco Perpetual’s European Equity Income Fund, with a 14.73 per cent exposure to Spain and a 6.39 per cent exposure to Italy, and J Chahine’s Digital Stars Europe Ex UK fund (7.10 per cent Spain, 13.20 per cent Italy), both of which have been awarded four crowns in FE’s Crown Fund Ratings, a respected independent rating system which measures alpha, volatility and consistency.

In the short term, investors in Germany may actually find themselves to be the losers in this scenario, as funds flow more freely outwards and the country finds itself becoming an explicit guarantor to some of the more irresponsible members of the eurozone periphery, leading to a potential fall in its credit-worthiness. The winners of scenario two could thus turn out to be the losers of scenario two.

Scenario three: Radical change

We have seen a growing appetite amongst European voters for radical change, with Beppe Grillo’s protest party causing havoc in the Italian elections, the anti-Europe UK Independence Party gaining ground in British by-elections and the relative rise of the communist party in Spain. Germany’s wild cards are the Green party, which is one of the more politically sophisticated parties of its type in Europe; the Pirate party, which helps itself to a sizable portion of the youth vote; and the newly formed Alternative fuer Deutschland (AfD), an anti-Europe party which is currently only polling at 3 per cent but whose very existence sends a chill down the spines of some of Europe’s most powerful statesmen.

Due to the nature of the proportional voting system, it is possible that one of these wild cards might find itself in the position of kingmaker. In the extremely unlikely event that this results in Germany’s departure from Europe, it is hard to see any winners at all in the short term and a high number of losers.

Those trying to avoid being embroiled in this potential storm could invest in the US, for instance with the GAM North American Growth Fund (four FE Crowns), or in Asia through Ruffer’s Pacific Fund (five FE Crowns). While either of these options might minimize the potential risk, in truth it would be hard to find any investment which would be unaffected by the fallout of the eurozone collapse which would surely follow a German departure.