German Chancellor Angela Merkel's conservative bloc appeared to have won the most votes in Sunday's national election and was likely to form a center-right coalition government with a smaller pro-business party.
What this means for investors
"The next German government will need to address the issue of rebalancing the economy," said Carsten Brzeski, analyst at ING, in a note to clients on Friday. "Even if the near-term outlook looks bright, stronger domestic demand is a prerequisite for sustainable growth over the medium term."
Rebalancing would have to involve both stimulating private consumption and increasing the investment ratio, as Germany has one of the highest tax burdens for households and at the same time one of the lowest investment ratios of all European countries, according to Brzeski.
In general, Germany's right-wing parties want to reduce taxes for all taxpayers and create investment incentives, while the left-wing parties support minimum wages, more social benefits and higher taxes for top earners.
Nuclear power was a controversial issue in the election campaign. The SPD favors an early shutdown of existing nuclear power plants, while the CDU supports extending the life of nuclear facilities to give Germany more time to meet its renewable energy goals.
If the center-right parties emerge victorious, the share prices of utilities E.On AG (DE:EOAN 28.43, +0.18, +0.64%) and RWE AG (DE:RWE 62.30, +0.04, +0.06%) are bound to outperform their sector as well as the DAX30" on Sept. 28, wrote analysts at Credit Suisse in a note on Friday.
The analysts, however, expect negative sentiment toward the two utilities if the left-of-center parties garner enough support to avert a pro-nuclear coalition.
Germany is one of the global leaders in renewable energy. A center-right coalition is likely to reduce the so-called feed-in tariffs that have driven growth in this sector, particularly in the solar industry.
If solar tariffs are cut, the reduction is likely to come in 2011, so there may be a surge in demand next year. Some of the companies that may benefit from the demand surge are SolarWorld AG (DE:SWV 16.10, -0.30, -1.83%) and SMA Solar Technology AG (DE:S92 66.86, +1.06, +1.61%) . Read more on solar energy.
German equities have tended to rise in years when the make-up of the ruling coalition changes. On average, election years see Germany's DAX (DX
AX 5,581, -23.80, -0.42%) index of top shares fall by 1.5%. In the four election years since 1969 when the reins of power changed hands, the index has gained by 24.2% on averag
