The upcoming German election could bring greater political clarity in Europe’s largest economy, and provide a tailwind for the country’s stockmarket, according to Morningstar.
Michael Field, chief equity strategist at the firm, laid out his thoughts in a recent note.
“Outflows from German equity funds have been a recurring theme for several years now down to relative underperformance, particularly versus US stocks,” Field said.
“However, equities in the region have outperformed the rest of Europe thus far in 2025. Much of this outperformance however has come from large index weightings to global firms like SAP and Siemens, who have little exposure to the German domestic market.
“Sectors like autos, defence, and utilities are poised to be impacted from targeted support and renewed investor confidence, creating potential for long-term growth,” he noted.
In autos, Field said infrastructure upgrades and supportive policies, particularly toward EVs, could reignite growth.
The sector should be a political priority as German automakers need coordinated production strategies similar to those seen in China to stay competitive globally, Field said.
Preserving jobs in the auto sector is strategically important from a political point of view due to the relatively high wages and large contribution to the tax base.
Defence companies look likely to benefit from an uplift in defence spending, according to Field.
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“All parties support 2% minimum defence spending level, however AfD oppose Ukraine aid, which could complicate matters.
“With plans to exceed NATO’s 2% defense spending target by 2028, German defence firms like Rheinmetall stand to benefit significantly from the restocking cycle.”
“An additional focus on military modernisation through a €100bn special fund bolsters the market’s prospects.”
Utilities names also stand to benefit from policy clarity, in Field’s view, although there is a risk the AfD’s negative stance on renewables could harm some firms.
“Costs across the sector remain a challenge, notably Germany’s 37% higher electricity rate compared to the EU average,” he said.
“Flip-flopping on the future of nuclear reactors in the wake of the Fukushima nuclear accident caused outright financial damage to stocks like RWE and E.On. The closure of coal and lignite plants has also caused consternation amongst investors.
“The Energiewende policy to move Germany toward a climate-neutral energy system was one of the main sources of disagreement between the previous government’s parties that led to its collapse in December 2024,” he continued. “A new government will have to square the circle on electricity tariffs to incentivise renewables projects without further damaging competitiveness.”
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Banks are another sector that could see increased investor interest, according to Field.
“While no significant policy changes are anticipated, cross-border consolidation, like a possible Unicredit-Commerzbank merger, could spark momentum in the sector,” he noted.
“Resistance to full EU banking integration remains but shifts in sector dynamics could open pathways to a broader European banking union.”
