Germany’s benchmark Dax index turned briefly positive for the year this week, a rare spot of green among European stock indices that have mostly failed to return to where they started 2020 after shedding value in March’s sharp sell-off.
Although the index of 30 German blue-chips closed in negative year-to-date territory on Thursday, its rally over the past few months has brought it to just 1.1 per cent below where it ended 2019 — making it Europe’s best performing main equity market.
By contrast, the continent-wide Stoxx 600 benchmark is down about 10 per cent in the year to date, while the UK’s FTSE 100 has dropped about 18 per cent.
Analysts highlight the Dax’s bias towards those sectors which have led a global market recovery since March — such as technology and consumer stocks most exposed to the economic cycle — as well as optimism over the reopening of a country that has been widely praised for its handling of the pandemic.
“With the improvement in sentiment indicators and higher expectations for a cyclical recovery, the Dax has done particularly well of late,” said Christian von Engelbrechten, a Frankfurt-based portfolio manager at Fidelity International.
Unlike most European benchmarks, the Dax is a total return index, which assumes that dividends are reinvested. But even adjusting for this factor, German equities have outperformed. The MSCI Germany — which is based on the share-price performance of 62 large and mid-cap German companies — has outpaced its pan-European equivalent, as well as the Stoxx 600, since January.
Hopes that Europe’s economy is recovering from the Covid shock have encouraged investors to load up on consumer cyclical stocks, which include big retail names such as clothing brand Adidas, up about 17 per cent in the past three months. The consumer sector is the Dax’s biggest at 17 per cent of its market value — larger than the 14 per cent consumer share of the US blue-chip index.
The Dax’s performance reflects its “traditional cyclical exposure and also its heavy weighting in technology,” said Graham Secker, chief European equity strategist at Morgan Stanley.
The surge has been symbolised by SAP, the Dax’s largest constituent by market capitalisation, which is up 17 per cent in the year to date, hitting an all-time high earlier this week. The seller of enterprise software managed to increase its cloud revenues in the second quarter, and saw its overall operating profit rise by more than half after slashing expenses.
The tech sector as a whole has been seen by investors as a big winner from the global move to remote working, and the faster take-up of online retail. Overall, tech stocks account for 16 per cent of the Dax’s market cap, more than double the 6 per cent weighting of the pan-European benchmark.
Kasper Elmgreen, head of equity investment platform at asset manager Amundi, also points out that the Dax has little exposure to the oil and gas sector, allowing it to largely dodge the effects of a collapse in energy prices earlier this year.
The domestic story is also positive. “People are also remembering the strength of the German backdrop overall” and the fact that the country has “fared better than many counterparts during the pandemic,” said Mr von Engelbrechten.
Consumers in Germany flocked back to stores and sites in May, pushing retail sales in the country up by a record 13.9 per cent from the previous month, following the lifting of some coronavirus restrictions.
The Dax’s exposure to its domestic economy, however, is limited. Just one-fifth of constituent companies’ revenues is generated in Germany, according to FactSet data, while nearly a quarter is made in the US and 7 per cent in China.
This overseas exposure, particularly to China, was a problem when the pandemic first hit, said Markus Wallner, senior equity strategist at Commerzbank. But that sales mix is now helping drive Germany’s recovery, he added, pointing to the MSCI Germany’s outperformance, which really began to show in May.
Despite the rally, German equities have lagged a number of smaller markets such as Sweden and Switzerland so far this year. And there have been notable exceptions to the Dax’s outperformance. Last month, for example, Wirecard became the first member of the index to file for insolvency after the German payments company revealed a massive accounting fraud.
Commerzbank’s Mr Wallner said European companies were able to outperform in their second-quarter results owing to a drastic reduction in analysts’ expectations at the depths of the crisis. He thinks this potential for forecast-busting results that can drive the market higher will fade as estimates are adjusted upwards.
“I think in the coming weeks there will be no more outperformance or underperformance — I think all European indices are going to go sideways,” he said.
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