September 27, 2009 / 7:38 PM / 10 years ago

German elections seen triggering brief stocks rally

BERLIN/FRANKFURT (Reuters) - The German equity market is headed for a relief rally on Monday following the surprisingly clear outcome of parliamentary elections that point to a comfortable majority for a center-right government.

Fears proved unfounded that the vote could be decided via a complicated electoral system that allocates additional seats — something that could have tainted the political legitimacy of a coalition between Chancellor Angela Merkel’s conservatives and the liberal, business-friendly Free Democrats (FDP).

The left-leaning Social Democrats (SPD) suffered an historic defeat, prompting the party’s leadership to say they would retreat into opposition.

“We have clear political relationships, and (the winners) are exactly those parties that normally trigger positive reactions,” said Klaus Stabel, head of research at Frankfurt brokerage ICF.

“We will probably get a small bonus. I didn’t expect such a clear majority for the CDU-FDP and it will give the markets a lift,” he continued, adding that the euro would likely also profit slightly in Monday’s trading thanks to the decisive outcome.

While the election result would not impact his forecast that Germany’s blue-chip DAX index could rise some 1,000 points by March to 6,600 thanks to traditionally strong equity-market months, Stabel said it would help bolster the trend.

German nuclear power plant operators, such as E.On and RWE, are generally expected to benefit much more from the vote’s outcome, since parties on the left of the spectrum including the Greens and the SPD had pushed for nuclear plants to be taken off the grid starting in 2020.

“The rally will be noticeable alone from utilities since they can now expect an extension in the operating time of the nuclear power plants. For E.On and co., it’s wonderful,” said Kornelius Purps of UniCredit.

Renewable energy stocks, and in particular the highly subsidized solar power companies like Q-Cells and Solarworld would likely suffer.

Christian Schick, a member of Fortis Investment’s global asset allocation team, said the FDP’s calls for tax cuts could slightly widen spreads for Germany’s sovereign debt since it is unlikely that material cuts in spending would follow.

“If you look at the bond markets and current yields, the topic of government debt has not really been played — just the contraction in economic growth and deflationary risks,” he said.

Overall, market participants warned against over-interpreting the impact German elections would have on investment decisions.

“It’s known that political markets have the shortest legs in the world,” said equity markets expert Heino Ruland of Ruland Research.

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