Tax

German Elections - Wealth Industry Reactions

Jackie Bennion and Tom Burroughes, 27 September 2021

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Wealth managers, ahead of the weekend's German elections, set out what is at stake for investors. There are also significant tax issues in play that affect HNW Germans. Today, the centre-left SPD, which won the largest share of the vote, were trying to form a government.

Today, Germany's Social Democrats are trying to form a government after they narrowly won national elections - the first time since 2005. The centre-left Social Democrats (SPD) won 25.7 per cent of the vote, ahead of 24.1 per cent for Merkel's CDU/CSU conservative bloc, according to provisional results, Reuters said. The Greens scored 14.8 per cent and the liberal Free Democrats (FDP) obtained 11.5 per cent.

Ahead of the polling, wealth managers speculated on what a left-ward shift would mean for areas such as public spending, tax and sectors such as energy. We have already carried comments on how a possible shift to the left will be accompanied by higher taxes on the wealthy. A report by Reuters (24 September) said there has been a rush of HNW money to Switzerland from Germany, even though the Alpine State no longer allows foreigners to hold secret bank accounts. WealthBriefing, in its conversations with lawyers, trust and other sector advisors in Geneva earlier in September, noted that the general push for higher taxes in Germany and other countries will play into Swiss hands, even if the regulatory processes are more onerous. Rainer Zitelmann, who is a regular writer in WealthBriefing, wrote in June that affluent Germans were looking to move assets, and themselves, out of the country. (To some extent this rather echoes the shifts in populations out of California and New York, for example, to Florida, Texas and some lower-tax areas such as Tennessee.) On the economic front, whoever takes power has to wrestle with a decelerating economy. On Friday, the closely-watched IFO Business Confidence Index reading for September showed the third straight monthly decline.

While some of the comments might be wrongfooted by events as of the time of going to press, we hope these comments are of value.

The three most pressing issues that the new government needs to deal with are: demographic change, digitalisation, and decarbonisation, according to the Centre for Economics and Business Research, a UK-based organisation, said in a note yesterday. 

"Germany has one of the fastest ageing populations among EU states and the federal contributions to pensions already account for a quarter of the national budgets, a share that could rise to over 55 per cent by 2060. A serious reform of the pension system was not part of the election campaigns but is something that will need to be tackled sooner rather than later. On digitalisation, Germany has fallen far behind its peers," the CEBR said. "These challenges, especially digitalisation and decarbonisation, cannot be tackled simply through reforms and legislature – large investment programmes will be necessary to transform the physical and digital infrastructure of the country. Proposals have been made as to how this could be made possible without touching the constitutional debt brake."

"Our base case is that markets should be relatively unmoved by a coalition compromising three of the four more centrist parties (SPD, CDU/CSU, Greens and FDP). Should the more left-wing Die-Linke be part of the next coalition? This could lead to more uncertainty and therefore volatility in financial markets, not least on the equity side," Robert Greil, chief strategist at Munich-based private bank Merck Finck, owned by Quintet Private Bank, said. 

"Due to the generally increasing importance of more climate-friendly policies - irrespective of the climate policy commitment of the Greens and a corresponding election outcome - we assume climate-friendly business models and technologies will receive additional funding after the elections. Generally, the spotlight should be on the utilities, infrastructure, autos and real estate sectors. On utilities, a friendlier framework for the expansion of renewable energies can be expected with a switch to lower-carbon or carbon-free options. There will be an impact on both the energy and materials sectors.

"In regards to the auto industry, the transition to electric vehicles is progressing. A coalition including the Greens would probably be more negative for car manufacturers than a conservative government. This may lead to even stricter regulation requirements and put more pressure to shift to electric vehicles (EVs). Furthermore, the SPD and Greens want to impose speed limits on Germany's Autobahn, which could reduce demand for sports cars and premium cars.

"On real estate, we don't believe there will be a forced sale of portfolios of large private housing companies to state-owned housing companies or a splitting of these private entities if a red and green government would be formed. Housing companies are already investing heavily in modernisation and energy-efficient refurbishments, thereby also increasing the value of their properties. Regardless of the election outcome, the market environment should be supportive for building materials, machinery and electrical companies active in energy efficiency and green mobility."

Amundi, the European asset manager with €1.794 trillion of assets under management, said ahead of the poll that the role of the Green party, and hence its policy agenda, will loom larger. 

"Since the Greens are likely to be part of any ruling coalition, we expect an acceleration of the ESG focus. We believe that German assets could offer appealing investing opportunities to global investors, primarily in the equity market, with a focus on those industries that are transitioning towards the net-zero goal by 2045. More generally, sectors such as green energy and automotive might be attractive, given the focus on the transition towards e-mobility," the French firm said. 

On other matters, it said: "As the Merkel era draws to a close, the most likely winner in terms of votes and seats will either be the SPD or the CDU/CSU. Likely scenarios include the ‘traffic-light’ coalition (SPD-Greens-FDP) or the ‘Jamaica’ coalition (CDU/CSU-Greens-FDP). On the economic front, we should not expect abrupt changes, as the views of major parties are not particularly far apart on most economic topics and coalition logic implies consensus-based decisions. There is likely to be more appetite for fiscal spending than in the pre-COVID-19 era due to the need for higher public investment.

"On the investment front, with the CDU/CSU in the lead, we expect a more favourable combination for corporates and equities, as the party aims to reduce the tax burden and sponsor private investments on the road towards the green transition. A ‘traffic light’ outcome is probably priced in, while the emergence of a ‘Jamaica’ coalition might favour the German equity market, although only in the short term," it added.

Matthew Cady, investment strategist at Brooks Macdonald, said markets will not like the uncertainty polling results delivered on Monday. "Markets have long memories and will remember the last German federal election in 2017, when it took close to six months to agree on a government. With European economies still recovering from out of the shadow of the pandemic, that amount of time potentially spent in political gridlock is not a luxury that Germany’s politicians can afford."

Cady also raises how dependent European economies and financial markets are on central bank and government spending support, and the current air-pocket in German politics looks like providing less rather than more flexibility on policy in the very near-term, he said.

"The ultimate conclusion of Germany’s federal election carries important implications for future policy direction for both Germany and the wider EU. Until a new government can be agreed on, Merkel is likely to stay on as a ‘caretaker’ Chancellor in the interim, but for whoever takes over from her, it is no exaggeration to say that they will have some very big shoes to fill."

In its Monday morning brief, Goldman Sachs suggested that talks to establish a "traffic light" or a "Jamaica" coalition "will likely proceed "in parallel, but the Greens and FDP have indicated that they will also hold bilateral talks as joint kingmakers. These will be key to watch. We expect efforts to be made to reach an agreement before Christmas and see a slight advantage for the SPD, although the outcome is difficult to call."

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