The German economy is in a slump. The Chancellor – then and now an SPD politician – realises that something has to be done, and rolls up his sleeves. The decisions include tax cuts and fundamental labour market reforms. The coalition partner, the Green Party, also agrees. Although analysts and economists are sceptical at first, they recommend buying German shares once it has become clear that something is really happening in Germany. „Buy Germany“ is the advice. The German economy is growing again, and German equities are actually outperforming US stocks significantly.

This is not a fairy tale, but rather the „Agenda 2010“ action plan, which was voted through in the Bundestag in October 2003 –under Chancellor Gerhard Schröder. In the view of many experts, this reform was the blueprint for the recovery of the ailing German economy.

Today, Germany is (once again) seen as the „sick man of Europe“. The „traffic light“ coalition government has collapsed, and investors are pinning their hopes on the Parliamentary elections to be held on 23 February. „The upcoming elections offer the opportunity to reorient the country, and resolve the reform backlog,“ comments Olgerd Eichler, fund manager at MainFirst. „A new government could drive forward the necessary changes in the areas of digitalisation and bureaucracy.“ However, this will require clear goals, bold decisions, and a targeted economic policy.

An Agenda 2030 would be important to set the domestic economy back on course for growth, and strengthen companies, especially small and medium-sized enterprises. The German economy has recently shifted into reverse gear and the number of insolvencies is rising. The domestic economy is having less of an impact on the Dax corporates. Companies such as SAP, Siemens, Deutsche Telekom, Allianz, Airbus and Munich Re are globally active groups. The Dax companies generate around 80% of their revenues abroad. They benefit from a global economy that is developing more strongly than Germany and Europe, particularly in the USA, where President Trump has taken the helm and announced tax cuts and deregulation to stimulate growth. Dax companies can also relocate jobs and production facilities abroad, and do so if Germany is too expensive or too bureaucratic.

On the stock market, Germany's economic weakness therefore primarily affects the second and third-tier stocks listed in the MDax and SDax. This is also reflected in the performance of recent years. The Dax has risen by more than 40% since the beginning of 2021 and is at a record level, while the MDax and SDax have actually fallen over the same period. In Eichler's opinion, many of the SMEs offer significant opportunities to catch-up. „The low valuations of these stocks indicate particularly high price potential," he says. If there were to be a new growth agenda in Germany, with lower taxes, less bureaucracy, and structural reforms, this would of course also benefit the Dax stocks. But to a lesser extent than the second and third-tier stocks.

However, a number of economists and market strategists are sceptical as to whether really effective reforms will be passed in Germany after the election. This is, of course, partly due to the vote distribution currently being indicated by opinion polls, which would make it challenging to form a new coalition government.

It currently appears that the CDU/CSU is likely to become the strongest party. But a Chancellor Friedrich Merz would need coalition partners. It could be a close vote for a possible two-party constellation of CDU and Greens, or CDU/CSU and SPD. This would be the case if one or more of the aforementioned parties were to fall behind before the election, if the AfD were to make even greater gains than previously expected. Which parties clear the 5% hurdle will also play a role.

„In the wake of the new elections, we mostly expect moderate support for the economy over the next two years, partly through an easing of the debt brake,“ says Felix Hüfner, UBS Chief Economist for Germany. „The structural headwinds – an ageing population and competition from China – are likely to persist and continue to slow long-term growth.“ UBS estimates the probability of a growth boom after the election at only 15%.

Pointing to the current stagnation and deindustrialisation, Klaus Bauknecht, Chief Economist at IKB, says that "neither the expected moderate economic recovery in 2025, nor individual proposals, would make a difference in the short term.“ This is because the sentiment in the economy is chronically poor, and there is a lack of credibility with regard to Germany as an industrial location.

If you take a closer look at the parties' election manifestos, there are certainly aspects that economists believe would improve the framework conditions for the German economy and that should benefit the companies represented in the MDax and SDax. The CDU/CSU campaign programme says that it intends to reduce the corporate tax burden to a maximum of 25%, abolish the residual solidarity tax, and improve depreciation and loss offsetting.

The CDU/CSU also wants to reduce electricity tax, and grid fees. The FDP also wants to reduce corporate taxes to below 25% and improve depreciation. And the AfD, which none of the other parties want to work with, is also planning to reduce corporate taxes to an internationally competitive level.

A permanent reduction in the rate of corporation tax by five percentage points would have a very significant effect. According to calculations by analyst Gerry Fowler from UBS, this measure would boost after-tax profits in Germany by around 7% (based on an Ebit margin of 10%). This would therefore benefit small and mid caps operating in Germany.

„According to current polls, an alliance between the CDU/CSU and FDP, which is favoured by many economists, has no chance of winning a government majority,“ says Carsten Klude, Chief Economist at M.M. Warburg. The CSU has also ruled out a coalition with the Greens. „That would leave only a new grand coalition between the CDU/CSU and SPD, as all parties reject a coalition with the AfD. However, hardly anyone would associate a grand coalition with new departures and reforms.“

In contrast to the CDU/CSU and FDP, which primarily want to improve the framework conditions, the SPD and Greens are focusing more strongly on stimulating investment through government programmes. The SPD wants to create a German fund „that mobilises public and private capital in order to meet the most important investment needs.“ This fund would initially be endowed with 100 billion euros. The SPD also wants to lower energy prices.

„Even if the SPD and the Greens want to create tax incentives, the credibility of long-term attractive returns on private investment remains questionable,“ says IKB chief economist Bauknecht. „This is because their increased focus on distribution goals will keep up the pressure on government spending and therefore the necessary tax revenues. Sustainable and therefore credible tax relief starts with spending policy.“

Higher spending is always a better sell in election campaigns than cuts. This applies to all parties, but especially to those focussing on distribution goals.

According to Bauknecht, the CDU programme in particular could promote growth in the German economy. This is because it would improve the framework conditions. In addition to „more market“ and a reduction in corporate taxes, the CDU attaches importance to incentives to increase potential growth and reduce labour costs.

„In principle, these would credibly improve the return prospects for Germany as a business location,“ says Bauknecht. One example of this is the labour market reforms of the Schröder Agenda 2010. As a result of these reforms, the share of employee compensation in national income was reduced, which was tantamount to an improvement in returns, leading to a noticeable increase in investment in Germany until the financial crisis. However, investment behaviour was already more dynamic before the reforms than it has been since 2018.

Whether an Agenda 2030, as called for by CDU/CSU Chancellor candidate Merz, will succeed after the elections remains questionable in view of the likely coalition situation, leading to difficult coalition negotiations. However, the risk/reward ratio for investors in the MDax and SDax is quite favourable. After all, the markets' expectations for Germany are rather low.