Merkel To Secure Fourth Term As Chancellor: ETFs In Focus

Angela Merkel secured her fourth term as Chancellor of Germany but her party, the Christian Democratic Union (CDU), witnessed its worst results since 1949. From the 2013 election, CDU’s share declined 8.5 points to 33%. Therefore, Merkel is faced with two options, either to find coalition partners or to run a minority government (read: German GDP Rises in Q2: ETFs in Focus).

The two main parties, Merkel’s CDU and Martin Schulz’s Social Democrats (SPD) received far less support than expected as the far right garnered great support. In fact, anti-immigration Alternative for Germany (AfD) secured 12.6% of the votes as Germans opposed Merkel’s friendly refugee policy and her handling of the 2015 migrant crisis.

Moreover, the AfD secured a lot more support than the Free Democrats (FDP), the Greens, and the Left. Six parties are now expected to enter the lower house for the first time since 1953.

What’s in Store?

Per a Guardian article, speaking on Television after the exit poll results, Merkel ruled out the option of running a minority government, as she seeks to form a stable government for Germany.

After a disappointing defeat for SPD, Schulz does not plan to renew the coalition with the CDU and instead wishes to remain in opposition.

Merkel can form a coalition with the FDP (10.7%) and the Greens (8.9%) in what is called a Jamaica coalition. CDU members expect the other two parties to agree in order to stay in power.

Merkel is faced with the task of securing enough support in order to govern. However, this process might take months. Moreover, Schulz is confident about the Jamaica coalition to go through as he stated in a post election debate that “Merkel will make any concession possible to hold on to the Chancellery.”

Risks Involved

The rise of the AfD is a threat to pro-Europe Merkel. With a campaign centring on immigration, their greater relative support speaks volumes about the change in German mindset. Aiming to close borders to asylum seekers, AfD lead candidate Alexander Gauland stated that the party will run an inquiry into Merkel’s refugee policy (read: Germany Posts Near Record Budget Surplus: ETFs in Focus).

AfD’s entry into the parliament shows that far-right populism is still a concern in Europe as Germans are worried about losing jobs to immigrants and the apparent threats to national security from the so called Islamophobia.

Moreover, if the Jamaica coalition goes through, the harsh stance of the FDP toward Europe will make it difficult for Merkel to work alongside France’s Emmanuel Macron to secure further integration in the euro region.

Adding to the agony, despite being traditional allies, a coalition with the FDP and the Greens has not been tested at a national level. This is not comforting to investors. As a result, the Euro declined, snapping its long rally.

Let us now discuss a few ETFs that are primarily focused on providing exposure to German equities (see all European equity ETFs here).

iShares Currency Hedged MSCI Germany ETF HEWG

This fund is an appropriate bet for those looking to gain exposure to Germany without betting on the euro and is the hedged version of EWG. We believe it is best to remain hedged to the currency till political uncertainty in the region is dealt with.

HEWG has AUM of $662.1 million and charges 53 basis points in fees per year. Consumer Discretionary, Financials and Materials are the top three sectors of this fund, with 18.6%, 15.1% and 14.4% allocation, respectively (as of Sep 22, 2017). The top three holdings of EWG are Bayer AG (DE:BAYGN), SAP and Siemens AG (DE:SIEGn) with 7.8%, 7.7% and 7.6% exposure, respectively (as of Sep 22, 2017). HEWG has returned 8.4% year to date and 18.5% in a year (as of Sep 22, 2017). As such, HEWG currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

WisdomTree Germany Hedged Equity Fund DXGE

This fund seeks to provide exposure to German equities without betting on the euro.

DXGE has AUM of $114.32 million and charges 48 basis points in fees per year. Consumer Discretionary, Industrials and Financials are the top three sectors of this fund, with 23.9%, 18.3% and 16.7% allocation, respectively (as of Sep 22, 2017). From an individual holdings perspective, Allianz (DE:ALVG) SE, Daimler AG (DE:DAIGn) and BASF SE (DE:BASFN) are the top three holdings of the fund, with 6.7%, 5.9% and 5.9% allocation, respectively (as of Sep 22, 2017). It has returned 10.1% year to date and 21.2% in a year (as of Sep 22, 2017). As such, DXGE currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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