Sept. 19 (Bloomberg) -- German stocks may fall after Angela Merkel's Christian Democratic Union and her allies, the Free Democratic Party, unexpectedly failed to win a majority in yesterday's election. RWE AG and E.ON AG may lead the declines.

Merkel, who pledged to stimulate the economy by reducing labor costs and cutting corporate taxes, and Chancellor Gerhard Schroeder yesterday both claimed the right to lead the government after an inconclusive result. Investor optimism about an end to Social Democratic rule had propelled the benchmark DAX Index above 5,000 for the first time in more than three years this month.

``This is absolutely not a positive result for the market,'' said Nicola Facciorusso, director of equity sales at Sal. Oppenheim Jr. & Cie. in Munich, in an interview late yesterday. The DAX may lose as much as 150 points today, he predicted.

Merkel's CDU won 35.2 percent of the vote and the FDP got 9.8 percent, according to projections from NTV television. The Social Democrats won 34.3 percent, while Schroeder's current coalition partners, the Greens, won 8.2 percent of the votes. The CDU may get 226 seats in Parliament, while the SPD may win 220 seats in the lower house, according to the projections.

The final poll before the election, published Sept. 15 for the Frankfurter Allgemeine Zeitung newspaper, showed the CDU and its Bavarian sister party, the Christian Social Union, at 41.5 percent, with the FDP at 8 percent, enough to form a government. The Allensbach poll put the SPD at 32.5 percent, with the Greens at 7 percent and the new Left Party at 8.5 percent.

Grand Coalition

Party leaders late yesterday ruled out possible alliances other than a ``grand coalition'' between the CDU and SPD, which would be the first such government since 1969. For the CDU, yesterday's result was the third-worst result since World War II. It was the SPD's worst performance since 1990.

``This result has grand coalition written all over it,'' said Nick Sloane, a trader at SEB AG in Frankfurt, late yesterday.

The DAX had risen 14 percent from May 22, when Schroeder called for elections a year ahead of schedule, through Sept. 16. The German index outperformed both the U.K.'s FTSE 100 and France's CAC 40, which added 8.8 percent and 10 percent.

E.ON and RWE, Europe's second- and third-largest utilities, may lead the declines. Merkel planned to scrap an agreement signed by Schroeder's government with utilities in 2000 to phase out nuclear power over the next 20 years. The utilities can generate power at their nuclear plants for a fifth of what it costs at hard- coal or natural gas-fired power stations.

Utilities Slump?

``The stocks most strongly geared into the election outcome are utilities,'' said Ralf Kugelstadt, an analyst at UBS AG in Frankfurt in a note published Aug. 30. Anything less than a CDU/FDP victory ``implies downside risk for E.ON and RWE.''

Dusseldorf-based E.ON, the world's largest publicly traded electric utility, rose 3.9 percent and Essen-based RWE, Europe's third-biggest utility, added 3.1 percent the first day of trading after Schroeder announced his plan to call for early elections.

E.ON has gained 17 percent to 79.53 euros since then, and RWE has added 20 percent to 56.90 euros.

``If the CDU does not get a clear mandate we expect utilities to react negatively,'' Mislav Matejka, a London-based equity strategist at JPMorgan Chase & Co. wrote in a note to clients published Sept. 13.

On Sept. 16, the DAX climbed 1.6 percent to 4986.50, its biggest gain since Aug. 10, with 28 of the benchmark's 30 stocks advancing.

Siemens, BASF

Stocks such as Siemens AG and BASF AG may also decline. Merkel's election proposals had favored companies that produce a majority of their revenue outside of Germany and employ thousands of people at home, Bernd Meyer, a Frankfurt-based strategist for Deutsche Bank AG, said in a July 12 note.

The SPD opposes Merkel's plans to cut income tax and to make it easier for companies to fire staff and opt out of nationwide pay agreements.

Siemens, Germany's biggest engineering company, generated 77 percent of its revenue abroad last year. The Munich-based company's German workforce amounts to 164,000 people, or 38 percent of its global staff. Shares of Siemens have gained 8.7 percent to 63.90 euros since May 22.

Ludwigshafen-based BASF, the world's largest chemical maker, has advanced 15 percent to 60.40 euros since May 22. The company made 80 percent of sales outside of Germany in 2004 and employs more than half of its 81,955 workers locally.

To contact the reporter on this story: Chris Fournier in Frankfurt at Cfournier3@bloomberg.net

Last Updated: September 18, 2005 18:31 EDT