Implications of the Upcoming Election for Germany's Corporations

By Christoph Steitz

FRANKFURT (Reuters) - Germany goes to the polls on Sunday amid prolonged weakness in Europe's top economy and as companies warn of a rapidly worsening environment, putting the country's industrial future at risk.

Following are some of the key issues for companies, how the parties are planning to tackle them, and which stocks could benefit:

WHAT ARE THE BIGGEST CHALLENGES FOR COMPANIES?

Bureaucracy and costs.

Companies have heavily criticised the amount of red tape, both on the domestic and EU level, calling for far-reaching simplification, particularly in the field of energy.

A recent survey by the German Chamber of Commerce and Industry showed 60% of firms citing economic conditions, including bureaucracy and high labour and energy costs, as the biggest risks to business, an all-time high.

Business leaders have also warned of deindustrialisation as companies opt to invest elsewhere due to more stable conditions.

Germany lost a combined 320 billion euros ($335 billion) in net investments between 2021-2023, the IW economic institute has said, more than tripling from the 2018-2020 period.

WHAT ARE THE PARTIES PLANNING TO DO?

There are pledges by the big parties, most notably the Christian Democrats (CDU/CSU), the Social Democrats (SPD), the Greens and the far-right Alternative for Germany (AfD) to cut red tape and bring down costs.

For companies, a proposal by the CDU/CSU to cut the corporate tax rate to 25% from more than 30% now, as well as plans to abolish a national supply chain law, could have the most tangible impact.

The CDU/CSU has signalled some openness to a moderate reform of the debt brake, an aspect closely watched by markets as it could unleash public funding for its ailing economy.

All parties agree that electricity costs for industry, which are more than twice the levels in the United States and China, have to come down, but they differ in how they plan to fix this.

WHICH STOCKS COULD BE MOST IMPACTED?

Small and medium-sized companies, which form the backbone of Germany's economy, are expected to benefit more from any pro-business initiatives, as they make most of their sales at home - unlike German blue-chips.

Morgan Stanley expects that corporate tax cuts could boost the earnings of DAX and MDAX companies by an average 1.1% and 1.6% a year, respectively, over the next three years.

The most exposed stocks are Scout24, Porsche AG, Commerzbank, Deutsche Bank, MTU Aero, BMW, Volkswagen, Rheinmetall and Lufthansa, the brokerage writes.

Auto stocks, including Mercedes-Benz, could receive a boost from efforts to subsidise electric vehicles by the SPD and Greens, as well as CDU/CSU plans to reverse a ban on combustion engines, Deutsche Bank says.

Goldman Sachs also expects defence companies to benefit from higher spending expected under CDU/CSU leadership. Apart from Rheinmetall and MTU, German-listed defence stocks include Hensoldt, Renk, Airbus and Thyssenkrupp.

($1 = 0.9547 euros)

(Reporting by Christoph Steitz; Additional reporting by Danilo Masoni; editing by Matthias Williams)