How will upcoming European elections affect stocks?

An email from a market analyst this week made me laugh. It said: “the twin election this year, the US and the UK, will affect IPO and M&A activity”.

Yes, that’s true, they will. And yes, the shock UK election announcement is still being digested. But what is not really funny is that a massive third election is due in less than two weeks and yet is getting little to no attention.

Between 6 and 9 June the Europeans will elect their new parliament and the new commissioner and over the next five years these new players will decide Europe’s direction on a number of issues that will be crucial for large corporates such as energy transition policies, EV and other green targets, China trade policy and migration.

Let’s break it down.

What do the European election polls say?

Looking at the polls, there is likely to be a major shift in the makeup of the European Parliament with right to hard right parties gaining the majority of the current leadership, which is more central. However, Commission President Ursula van Leyen is likely to remain in her position for another five years. What does that mean for stocks?

To start with, the Greens will lose a substantial number of seats as issues such as cost of living, immigration and unemployment have pushed climate change down the list of key priorities. Consequently, a number of binding targets on renewable energy and a 2035 ban on fossil fuel cars, while not outright revoked, could end up being “reviewed” with subsidies and implementation dates being pushed further into the future.

Companies that will feel this change are car makers (Volkswagen, Stellantis [EURONEXT:STLA], Mercedes-Benz Group, BMW, and Renault [EURONEXT:RNO]), large industrials which are involved in the green transition, wind, electricity and energy storage such as Vestas, BASF and Siemens Gamesa. The change of direction will play into the hands of energy companies like Shell LON:SHEL, Eni, Total and Repsol.

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Defence stocks

The expected swing to the right in the European elections will shift the focus on immigration and the war in the Ukraine, very likely leading to higher defence spending. The conflict in the Ukraine has already benefited aerospace and defence stocks in the last two years with the likes of Germany’s Rheinmetall [XETR:RHM] gaining over 500% during the period and France’s Safran [EURONEXT:SAF] and BAE LON:BA. both rising by over a 100%.

A more right leaning Parliament could also soften its stance on trade with China and reduce some trade restrictions, tariffs, and emission requirements. This is a double-edged sword because it will benefit companies buying components from China but will outright demolish those that are in direct competition with Chinese producers such as industrial manufacturers and EV car makers.

However, Europe will want to preserve jobs and grow certain industries such as electronics, digitalisation and artificial intelligence. The Dutch chip-making machinery producer ASML and Germany’s Infineon will still likely to be protected by European laws on electronics even if some China trade rules are relaxed.</p>

While the European elections may not receive the same amount of column inches as Sunak, Starmer, Trump and Biden, primarily because the effects on the stock markets in the immediate aftermath might be much more subtle than US and UK elections, nevertheless it would be prudent to keep an eye on EU policies that will follow, because they will have a very persistent and cumulative effect across a broad range of shares for years to come.

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