Here’s one slim opportunity to play the German election


Imagine having three children two who are drama queens, and one who is calm and mature, as if there were another grownup in the family.

The first two might represent recent United Kingdom and French elections that sparked outsize moves in markets. Meanwhile, Germanys upcoming ballot plays the part of the strong and stable child to borrow a Tory campaign slogan that failed to resonate with U.K. voters.

German Chancellor Angela Merkel looks set to cruise to her fourth term, and the main question has involved which parties will team up with her Christian Democrats to form a governing coalition. Yet investors are still keeping an eye on the Sept. 24 federal election in Europes largest economy, says Seema Shah, a London-based strategist for Principal Global Investors. It could provide investing opportunities, even though it doesnt look like a big market mover, she says.


Read: Who is Merkel up against in the German election, and what are their chances?

The June vote in Europes second-biggest economy was a different story, as U.K. Prime Minister Theresa Mays gamble to secure a larger Conservative majority backfired, sparking a slump in the pound for several sessions. That came a year after the Brits voted to leave the European Union, shaking up markets worldwide. And voters in France, the No. 3 economy, triggered a global rally for stocks in April, when they gave now-President Emmanuel Macron a victory in the elections first round.


In the past year, the elections youve had in Europe as well as in the U.S. have gotten a lot of market attention, with at least before-the-election speculation that there could be a major change in policies, Shah says.

Check out: How the boring German election could lift or drag on the eurozone

On the other hand, neither Merkels Christian Democrats nor the Martin Schulzled Social Democrats, the party polling a distant second, appear likely to alter the status quo in foreign or domestic policies.


However, there could be a buying opportunity in European stocks if Germanys election campaign, described as bland and boring so far by the media, somehow starts to put traders on edge in its final week.

If you do see any widening in spreads on Bund yields, or if there is some market concern growing about the German election, thats an opportunity to get in, because this should not have a big impact, Shah says.

Investors should buy the dips in European equities because more gains are coming, thanks to a favorable backdrop, she argues. The Stoxx Europe 600 SXXP, +0.09% , Germanys DAX DAX, -0.06% and other European indexes have been holding below 2017 peaks hit in May and June, but fresh highs will arrive in due course, says Shah.


Quiz: Show what you know about overseas stocks

She predicts that the European Central Bank will gradually taper its bond-buying program, a key stimulus effort, over nine to 12 months, with that process starting early next year. She forecasts no interest-rate hikes until 2019 and sees ECB President Mario Draghi possibly talking down the rallying euro, which has been a headwind for shares of European exporters.

So putting that together, its a kind of slow, steady improvement for Europe. Thats the best kind of circumstances that you want for equity markets, says Shah.


See: A hawkish ECB has placed German bund yields squarely in the spotlight

Popular U.S.-listed plays for betting broadly on European stocks include the iShares MSCI Eurozone exchange-tra ded fund EZU, +0.20% and the iShares MSCI Germany ETF EWG, +0.19% , which trade around 14 to 15 times predicted forward-year earnings, well below the SPDR S&P 500 ETFs SPY, +0.02% multiple of 19.


Many strategists have been upbeat on European stocks prospects this year. While the Stoxx Europe 600 has fallen about 4% from its mid-May peak, its still up more than 5% for the yearand bulls arent throwing in the towel.

The index looks set to rise by years end to 400, according to a Barclays team of European equity strategists led by Dennis Jose. That implies an advance of 5% from the gauges recent print around 381.

The primary culprit for the decline from French election highs has been the euro rally, but that also creates buying opportunities, write Jose and his colleagues in a recent note. Domestically oriented companies such as bank and transportation stocks stand out as key winners from euro strength, and they should start to outperform, they note. On their list of domestically focused firms worth considering: German lender Commerzbank CBK, -0.33% , mail and courier service Deutsche Post DPW, +0.55% and airline Deutsche Lufthansa LHA, -0.52% .


The German election could buoy European stocks by simply getting out of the way.

The focus among investors is currently, and quite rightly so, on the ECB, inflation, and geopolitical tensions, Shah says. Once the election is over, then it allows discussions that are happening around the world to continue.

Dont miss: 5 things you dont know about Germanys Angela Merkel

And more from Barrons: ASML and SAP: Euro Tech Stocks in the FANG Class

This report first appeared at barrons.com on Sept. 15, 2017.

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