Markets: Merkel will keep recovery on track

The economic recovery of the eurozone to date looks sustainable, and the re-election of Angela Merkel will help to reassure markets.

Standing ready for her third term, Angela Merkel is giving eurozone equity markets the continuity they crave. Companies and market players equally are familiar with Merkel’s pro-eurozone policy and can allow for this when making decisions.

Merkel’s victory at the weekend’s election is confirmation the German public support the decisions she has taken to steer Germany and the eurozone through the crisis that has plagued the monetary union for three years.

Recently investors have felt more comfortable about the risks on offer in Europe. The outlook for the year ahead for the eurozone is easily the best in three years.

Positive GDP and earnings growth are tipped to return to the monetary union. For eurozone equity investments to be of any value to investors, companies will actually need to deliver earnings growth in what could possibly be a softer growth environment. While the task does seem challenging, the end of the crippling recession should help support the cause.

Considering the continuation of quantitative easing in its current form and Merkel’s re-election it looks like Europe is ripe for pickings. The hazards enveloping the eurozone not so long ago have substantially cooled – a break-up of the monetary union is off the cards, banks are looking much stronger and earnings are finally tipped to grow.

Germany, accounting for 28 per cent of the eurozone economy, is at the centre of the region’s security. But the eurozone is not just about Germany. The peripheral countries are ready to step up and be included in the eurozone growth story. As fiscal headwinds dwindle over the next year and credit conditions improve, it will lead to the periphery becoming more competitive once again.

Austerity measures are often talked about, but the next wave of growth for the challenged monetary union will need to be organically-driven, through small to medium businesses. Austerity is almost a moot point, with the belief the more severe measures won’t actually be carried out.

Also working in favour of the eurozone is the improvement of both the UK and US economies, which are the largest export markets for the region. Providing demand from these markets remains constant, the recovery of the eurozone to-date looks to be sustainable.

Since touching lows in September of 2011 as Greek default fears troubled financial markets globally, the German index, the DAX has gained a staggering 71 per cent. A broader snapshot of the Eurozone, the Euro Stoxx index, has gained 46 per cent. Both have outperformed the ASX 200’s gain of 36 per cent over the same time.

Now, Merkel and the eurozone only need to navigate the next chapter once quantitative easing reduces, altering the allocation of capital once again.

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