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German Elections

Chancellor Merkel Secures Hollow Victory in German Election as AfD Makes Gains

Angela Merkel retained her post as Chancellor of Europe’s largest economy on Sunday, but the result signaled that a profound shift is under way in German politics. After 12 years, Merkel’s CDU/CSU will be given its weakest mandate yet, and will thus be forced to enter a more complicated coalition to form the government.

The Christian Democratic political alliance, which consists of the CDU and its Bavarian sister party CSU, came away with 33% of the federal ballot on Sunday. The left-leaning Social Democrats (SPD) came away with a little more than 20%, which isn’t far from what the pollsters predicted.

The most noteworthy takeaway was third-place finisher Alternative for Germany (AfD), which becomes the first overtly nationalist party to enter the Bundestag in 60 years. AfD secured close to 13% of the ballot, which was higher than what pollsters had predicted.

The rise of the far-right may cast a dark cloud over Merkel’s term. At the very least, it signals a change in sentiment from the prevailing post-war norm. The AfD was able to capitalize on growing discontent over immigration and the European Union.

The market-friendly FDP also came away with a little more than 10% of the vote. The Left and Greens earned a similar result. However, only the AfD and FDP made gains in the election. Combined, they converted roughly 157 seats in their favor, mainly at the expense of the CDU/CSU and SPD.

In a post-election speech, Merkel didn’t hide her disappointment in the outcome of Sunday’s plebiscite.

“The CDU would have hoped for a better result, but we mustn’t forget – looking back at an extraordinary challenge – that we nevertheless achieved our strategic objectives: we are the strongest party. We have mandate to form the new government and we will form the new government,” said Merkel, who is entering her fourth term as Chancellor,on Sunday.

How will the German election result impact the Eurozone? Click here to find out more.

Implications for the Rest of Europe

The rise of the AfD is hardly surprising. After all, the party made strong gains in state and European elections before outperforming at the federal level. AfD’s surge follows similar performances by other alt-right movements across Europe. Earlier this year, Geert Wilders led the Party for Freedom to second place in the Dutch election. Marine Le Pen’s National Front also made it to round two of France’s presidential election, where she was swiftly defeated by Emmanuel Macron.

AfD’s performance on Sunday suggests that Euroscepticism has spread to the core of the continent, so much so that it will lead to a major disruption in German coalition building. Martin Schulz confirmed on Sunday that his social democratic SPD will not renew its membership in Merkel’s ‘grand coalition,’ leaving the Chancellor to choose among the remaining parties. At roughly one-third of the Bundestag, the CDU/CSU will have a lot of politicking to do just to govern effectively.

At the same time, a renewed alliance with the Free Democrats is widely considered to be good for business and the economy. It remains to be seen whether these parties can work constructively with the Greens or the Left. Merkel has made it clear that she intends to win back the AfD vote. This could also mean working closely with the populist movement.

For the rest of Europe, the German election result is likely a sign of things to come. Several European nations will head to the polls next year, each with their own version of right-wing populism. The party poised to make the most noise is Italy’s Five Star Movement.

For now, it likely remains business as usual for the European Union.

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Three Dividends to Play Post-election

With the election behind us, investors are looking to reshuffle their portfolio for optimal results. However, they should breathe a collective sigh of relief because Sunday’s outcome isn’t expected to have a major impact on the market. This means investors are free to continue enjoying the Eurozone’s recent recovery. From a German perspective, the following three companies provide solid dividend growth and favorable prospects for the future.

Aareal Bank AG (ARL)

Aareal Bank is one of Germany’s leading financial solutions providers. It also happens to have a massive yield at 5.84%. The Wiesbaden-based company has underperformed the broader stock market in 2017, but has posted strong quarterly results, reaffirming its full-year guidance. The company has also set out an ambitious ‘Aareal 2020’ growth initiative, where it intends to increase its payout ratio up to 80%.

RWE AG (RWE)

RWE AG is a leading German utility company offering attractive yields and strong growth prospects for dividend investors. Share prices have nearly doubled this year, with analysts at Goldman Sachs recently affirming a favorable outlook on the holding company. RWE’s reach extends far beyond Germany and into the rest of Europe, where it provides leading power generation throughout the continent.

BMW (BMW)

One of the world’s leading car makers also happens to be a solid dividend payer with an outstanding track record of growth. BMW closed out 2016 with record figures – the sixth consecutive year doing so – and increased its dividends by around 9%. Margins contracted in Q4, but that was because of higher expenses tied to the BMW 5-Series, which entailed significant upfront expenses.

Looking for broader exposure to Germany and the Eurozone? Check out Foreign Dividend Stocks for a complete list of high-yielding equities from across the Atlantic.

The Bottom Line

Although far from a disaster for Merkel, the 2017 election result suggests that a profound change is under way for Germany. A failure to address the real grievances of the AfD voter base could cost the CDU/CSU party dearly in the future.

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