Germany and the DAX Index: a quick tour…
Compared to the FTSE-100 Index where financial services rule the roost, they appear to do things very differently in Germany. Chemicals, automobiles & parts, industrial goods & services: taken together, these three sectors account for well over half of the companies listed on Germany’s equivalent to the FTSE benchmark index, the DAX-30.
‘Made in Germany’ may be shorthand for excellence, but it’s not all plain sailing if you’re a manufacturing and export powerhouse. From China to California, if the global mood is that now’s not the right time to order that new Audi, you’re going to feel the pinch. So what does the near future hold for Germany and the DAX? Is this the right time to consider German stocks, or the index itself, as a trading option? We take a look…
DAX index fundamentals: how does Germany shape up?
Germany weathers the recession…
You may remember the moment last summer when George Osborne fanfared the fact that the UK’s economy had grown to a point where it had surpassed its 2008 peak.
Granted, this was a psychologically important milestone – but at the time – as now – the UK’s recovery looks very different to what has been happening in Germany. First off, speed of recovery: Germany romped past that peak more than three years earlier in Q1 2011, when the talk over here was still of double-dip recession. Secondly, the nature of recovery: whereas Britain’s recovery was – and continues to be, underpinned massively by the service sector and consumer spending, it was manufacturing that drove the German figures – and continues to do so.
Between 2009 and 2015, German exports increased by almost 30%. So how did Germany achieve this while her neighbours were languishing? A big clue can be found by looking at the country’s list of export destinations.
Perhaps unsurprisingly, neighbouring France comes top – although crucially, by no means do the Germans leave all of their eggs in the European basket. Just 40% of exports are within Europe and the second and third biggest recipients of German goods are the United States and China respectively. Not all countries were retrenching between 2008 and 2013.
Remember that China, for instance, was still in the midst of huge capital infrastructure projects during this time. With this came a growing demand for the type of precision-engineered capital goods and machine tools that Germany was able to meet. From China and the wider Asia Pacific region across to the likes of Latin America, consumer demand in many locations was growing too – and with it, steady demand for the likes of BMW and VW.
Germany’s economy at present and beyond…
You can’t help but have noticed the tremors in China over the summer. At the same time, most of Germany’s European neighbours could hardly be described presently as pictures of economic health. So DAX-30 companies will continue to face challenging times. But behind this there lie plenty of positives for German companies and the wider economy. For instance, it was recently announced that Shwarze Null– i.e. a balancing of the federal budget was achieved in 2014 – a year ahead of schedule. So what does this mean for companies on the ground? Well, as was pointed out last year in The Economist, Germany’s rate of public investment of just 1.6% of GDP is one of the lowest in Europe. The fact that the books are now balanced gives policymakers even more leeway to loosen the purse strings and get spending on big-ticket public projects in the event that foreign order books start to get worryingly light. Growth for the back end of 2014 was relatively sluggish. The indications are that the German economy will grow by around 2% this year.
German stocks and the global picture
Take a look at the Dax-30 and FTSE-100 5-year charts and you’ll see that the peaks and troughs of each are broadly aligned in terms of time. Broadly, similar types of factors affect the stock prices of both German and UK companies. There are important differences both in respect of what’s happening inside and outside of the Eurozone. Here’s a rundown of key general influencers on German stock prices…
The Eurozone
From Dublin to Athens, German-backed rescue packages were crucial in helping the economies of Portugal, Ireland, Italy and Greece get back on their feet post-2008. Looking back at the seemingly endless rounds of bailouts to Greece over the last couple of years however, one question springs to mind: how is Chancellor Angela Merkel able to get not just the Bundestag – but harder still, the general electorate to agree to handing over the cash?
The answer is that Germans, on the whole, have bought into the fact that the euro is good news. The likes of Spain, France and Italy have been nowhere near as successful as Germany over recent years. Broadly, this puts downward pressure on the currency and means that its value is almost certainly lower than a hypothetical Deutschmark – which means good news for exports outside of the Eurozone. What’s more, within the Eurozone itself, the fact that the vagaries and fluctuations of multiple exchange rates do not have to be factored in when considering selling to, say, France or Italy also makes life easier for German companies.
But a poor outlook for its near-European neighbours is of course bad news for those companies that are heavily exposed to those markets (the banking sector, especially). Bear in mind that discouraging data releases from individual countries on consumer spending power may be a precursor for depressed Europe-wide sales figures for your target companies. In turn, the inevitable consequence is downward pressure on the stock price.
Russia and Eastern Europe
A huge industrial base plus an almost complete reliance on external sources of oil and gas means Germany is exposed to the effects of Russian sanctions in a big way. Holders of stock in energy-hungry manufacturers should be wary of any escalation in, say, the still precarious situation in Ukraine as an early indicator of upward pressure on manufacturing costs and a negative profits driver.
China
The 2015 growth predictions for China has once again been revised downwards and the move away from big capital infrastructure projects means bad news for exporters of machinery, equipment and materials in the construction and engineering sectors (the ThyssenKrupps and Heidelberg Cements of this world). Longer term, however, the shift away from debt-fuelled capital infrastructure and towards services – together with increased consumer demands and expectations, raises the possibility of increased opportunities for those German manufacturers focused on the consumer market – (think Siemens and Adidas).
UK and US
Steady growth figures for two of Germany’s biggest trading partners mostly bodes well for DAX-30 companies. The expected hike in interest rates in both countries could prove to be fly in the ointment, though – especially if a rise in the cost of servicing existing loans means consumers decide en masse that now’s not the time to buy this year’s VW Golf.
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