The outcome: The election result in Bavaria marked the defeat of the conservative CSU, which lost its absolute majority, and of its junior ally, the SPD. An increase in political fragmentation emerged from the election, with the Greens and the AfD as the main beneficiaries. This election may be seen as an early signal of a political reshuffling at the federal level which we need to watch closely in the coming weeks.

Impact on Europe: This election confirms the breakthrough of some form of populism in Europe and shows that the migrant crisis does not only affect the countries with high unemployment rates. The political fragmentation is a broad based phenomenon that is clearly not (or not only) related to economic factors. The strong showing by the Greens, supporters of some European reforms and fiscal integration, could become a tailwind for the European project in this evolving political landscape.

Market implications: Market implications are negligible on European assets as a consequence of this local election. However, this is part of a complex European political framework and electoral calendar, with the Italian budget law process, Brexit and next year’s EU parliamentary elections next year representing three important milestones. Political issues, we believe, could limit the appeal of European assets for the time being. Opportunities may open up again in Europe if further risk asset repricing occurs, and Europe could return to focus with attractive valuations. Currently, however, in a context of risk neutrality, with a multi-asset perspective, we prefer US equities in our regional selection; we look for relative value opportunities in Europe at the sector level.