Commentary by Roxane Spitznagel, Vanguard economist

On September 26, Germans will vote for a new government as the Merkel era comes to an end. Angela Merkel, the first female chancellor of Germany, will have been in power for the last 16 years – some Germans who will vote in the elections were two years old when she took office.

The outcome of the election remains remarkably open, as polls have fluctuated substantially over recent months. At the beginning of the year, it appeared as if Merkel’s party, the centre-right Christian Democrats or CDU, would maintain most seats in the ”Bundestag”, the German parliament. They were subsequently replaced by the Greens, who led the polls for some time in spring. Over recent weeks, the SPD, currently the centre-left junior partner in Merkel’s governing coalition, has taken a surprise lead at about 25%, reshuffling the cards for potential coalitions (Figure 1).

The German leadership race has had many twists and turns

Source: Macrobond, as at 14 September 2021.

Possible coalitions remain widespread across the political spectrum, each with different macroeconomic implications. As Figure 2 illustrates, a “red-red-green” coalition (Left, SPD, Greens) is expected to bring most change to the status quo. It would likely focus on the relaxation of the debt brake (a 2009 amendment to the German constitution mandating a balanced budget), higher taxes for high incomes and very high wealth, as well as environmental policy. By contrast, a “Germany” (SPD, CDU, FDP) or “Kenya” (SPD, Greens, CDU) coalition would be expected to bring less change to the status quo, largely because they would still involve the CDU, although the participation of the Greens would likely imply a tilt towards more environmental policy as well as European integration.

Coalitions without the CDU, like a “traffic light” coalition (SPD, Greens, FDP), are likely to lead to more fiscal spending than, for instance, a “Jamaica” (Greens, CDU, FDP) coalition, because the FDP’s economically liberal policies would receive less weight in such a left-leaning coalition.

A “red-red-green” coalition would likely bring most change to the status quo

Source: Vanguard, as at 14 September 2021.

Given such a wide range of macroeconomic and financial market outcomes, how should investors think about these elections in the context of their portfolio? The below outlines three key principles to keep top-of-mind:

1) Political events, and their market implications, are difficult to predict

There are countless examples in history where the outcome of political events has not turned out as expected, despite the best efforts of polling companies and other sources. Two cases that are perhaps the most famous in recent history occurred in 2016, where both the UK’s vote to leave the EU and the US Presidential election surprised the market consensus.

However, even if investors can successfully predict the outcome, the market response is often difficult to anticipate. With the UK’s EU referendum and the 2016 US presidential election, consensus expectation was that Brexit and Trump would be negative for risk sentiment. However, UK stock markets rallied sharply in the days after the vote, whilst following Donald Trump’s election victory, US stock markets gained significantly and US government bond prices fell.

2) Remain disciplined and focus on long-term investment goals

As such events are highly unpredictable, it is therefore important to avoid the temptation to try to “time the market”. Vanguard research1 shows that it is “time in the market” – not market timing – that increases the chance of investment success. Those who remain disciplined and stay invested in the long run generally do better than those who try to profit from short-term uncertain events.

3) Be globally diversified

Finally, holding a portfolio diversified across asset classes and regions, in line with personal investment goals and tolerance for risk, will hold investors in good stead over the long-term. Having a global portfolio will increase the likelihood that negative shocks from individual markets and sectors will be dampened. 


1 Renzi-Ricci. G and Lucas Baynes, "The impact of being out of the market", Vanguard Research, July 2018.

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