Will Germany's Elections Shake Up Its Stocks?

Change is in the air in Germany. On Sunday, the country's parliamentary elections will help lay the foundation for the nation's new -- or not so new -- direction, and whether Chancellor Angela Merkel, who has presided over Germany's resilience against Europe's recession, will continue to lead her political coalition, or will step aside to make way for a challenger.

But how much will this affect stocks and investors in Europe's top economy? The DAX (^DAX) stock exchange picked up a modest 0.8% over the past week in the run-up toward the election, but Germany's economic growth remains fragile.

Elections on the horizon
It's hard to deny that Germany's done well under Merkel's leadership. The country's unemployment hangs far lower than many of its European neighbors, business sentiment is at its highest point in more than a year, and even the DAX has gained more than 56% over the past two years to impress investors, and has rebounded nicely in 2013 after a slow start to the year.

Even better for German businesses and stocks, trade has continued to rise despite waning exports to euro area nations. While Germany's exports to the latter group fell by 0.7% in July, trade to the rest of the world outside of Europe rose by 3.6%, as companies have increasingly looked to Asia, North America, and other growing regions for business. It's a strategy that's worked out well for Germany, but not so much for the rest of the debt-plagued eurozone -- and Sunday's elections could shake things up further.

Don't expect the markets to react much if Merkel maintains her current coalition, led by her Christian Democratic Union. That, or even a return to Merkel's coalition alliance with the left-leaning Social Democrats, would represent more of the same for the markets, and reinforce investor confidence in Germany's direction. However, an unexpected surprise -- perhaps by a coalition between the Social Democrats and Germany's Greens that uprooted Merkel from power -- could throw investors for a loop as the markets react to Germany's change of course.

How would the course change? Germany's elections lack the ferocity or partisanship of the U.S.'s, but make no mistake: Important issues, from energy to immigration to how to handle Europe's ongoing economic and debt crisis, are at stake. Germany and its markets have so far thrived behind its austerity-led approach to the eurozone, which, while garnering criticism from nations such as Greece and Italy, has preserved Germany's economic prowess and surging stocks. A looser approach to solving Europe's debt mess could unnerve Germans about the possibility of Europe's fiscal woes spreading into its top economy and the German markets.

Energy policy has also risen into the big picture, and it's a mark that Siemens (SIEGY 0.78%) investors should pay attention to. Siemens is one of Germany's largest firms, and a major player in the energy market, but the company recently pushed Merkel's government to cut back or end subsidies that have driven German electricity prices drastically higher recently.

Considering that Siemens has dealt with sales misses in recent quarters -- the latest of which resulted in a major management shake-up that investors already are watching with a close eye -- the company can't afford rising costs to slam its bottom line even more. Siemens's wind-power unit has performed well in Germany's clean-energy revolution, gaining sales growth of 37% year over year last year to become the company's second-largest energy segment behind fossil fuel power generation. However, new orders fell 24% in 2012, and Siemens will have to find new sources of revenue for clean energy if it wants to keep its energy business riding high.