Just when investors thought Europe's political drama was over for the year, talks to form the next German coalition have stalled. That further weakens Chancellor Angela Merkel, forcing her to either offer greater concessions to possible coalition parties or call a second election. This has the potential to unsettle investors.
But we believe the political setback is unlikely to turn into a roadblock for stocks.
- The German economy has considerable momentum, and is on track for its fastest expansion since 2011. A strong labor market, with record low unemployment, should support consumer confidence. So we expect the pace of German growth to slow only slightly from 2.2% this year to 1.9% next.
- Markets and economies have recently coped well with political bumps, especially in Europe. Spain has registered its highest GDP growth since 2007, despite political uncertainty arising from elections in both 2015 and 2016, along with the controversy over Catalan separatism.
- Political continuity in Germany is still the most likely outcome. We expect Merkel to remain in power, as head of the largest party in the legislature. She still has options, including seeking to run a minority government or renewing efforts to resume the partnership with the Social Democrats, who have until now rejected the idea of continuing the current coalition.
So, with economic conditions in the Eurozone continuing to improve, we still prefer Eurozone equities to UK stocks within Europe.
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