The slumping oil prices, worries about China and a slowdown in the U.S. economy have been plaguing stock markets since the beginning of the year. Global stocks entered into bear territory on Thursday, after the MSCI All-Country world index had fallen by 20 percent since May last year.
Germany’s blue-chip DAX index has fallen by 17 percent since the start of 2016 and nearly 30 percent since hitting its all-time high of 12,391 points last April. Concerns about the financial sector, in particular, sent the DAX cascading to a new 2016 low of 8,699 on Thursday. The index recovered slightly on Friday morning, gaining 1.6 percent to 8889 points.
In the midst of all this gloom and doom, it’s easy to overlook the positive fundamental data out there: growing economies in Germany, much of the European Union, and the United States. The German economy kept growing steady in the last three months of last year, expanding by 0.3 percent, the same growth rate as the preceding quarter, the Federal Statistics Office said on Friday.
The old market adage that says the way January starts will set the tone for trading at the end of December has held up a remarkable 77 percent of the time. However, not all the positive developments that fueled the seven-year upturn on the stock market can be cast aside for the rest of 2016.
“There are many good reasons why we could emerge with significant growth by the end of the year.”
Aside from a few leading indicators that are pointing towards a weakening, such as the Ifo index, which is based on a survey of 7,000 German companies, the economy in Germany is growing. The economies in many parts of Europe, in the United States and in China are also recording growth. No major industrialized country has slipped into a recession – and there are no signs of that happening anytime soon.
On the contrary, the economy is achieving moderate growth and is free from inflation. Stock market operators call this phase in the cycle the “Goldilocks Economy”. It is usually accompanied by a steady rise in share prices.
On Wall Street, the 500 biggest U.S. corporations earned less year-on-year in the fourth quarter of 2015, for the third consecutive quarter. This was the first time since the 2008/09 financial crisis that that happened.
This time, however, it is only the multinational oil companies that have caused the earnings recession. Exxon Mobil, Chevron and others have most recently reported profit drops of 50 percent and more, which has led the overall downward trend because of their large weightings in share indices.
After a rapid decline in share prices, many companies can once again offer investors an attractive dividend yield. The dividend yield is calculated based on the relationship between dividend per share and the current share price.
Right now, 14 of the 30 DAX-listed companies are offering yields of 4 percent or more. Some are even above that. Based on their current share prices, insurers Munich Re and Allianz, salt and fertilizer group K+S, energy giants E.ON and RWE, chemicals group BASF and automotive manufacturer Daimler are actually achieving yields of more than 5 percent.
Meanwhile, prices for the two main benchmark oils, Brent and WTI, have halved since last spring. Skeptics believe this the harbinger of a recession, as futures markets are anticipating a drop in oil consumption. However, experts agree this time that the falling prices are due to a surplus of oil combined with an increase in output, a situation exacerbated by the fact that Russia is producing more than at any time in the last 25 years.
Laurence Fink, head of Blackrock, the world’s biggest asset manager, has described the slump in oil prices as “a massive tax cut for the whole world.”
Consumers and almost all businesses are benefiting from plunging energy costs. Consumers save money because heating and fuel costs are down. That in turn boosts demand for trading and consumer goods companies. Industrial companies that use oil save on costs. Airlines are the greatest benefactors of falling energy prices, as kerosene accounts for the bulk of their operating costs.
“Compared to the spring of 2000, the world has turned upside down,” said Thomas Grüner from asset management firm Grüner Fisher Investments. According to his calculations, a 10-year German government bond bore annual interest of about 6.5 percent at the beginning of 2000, corresponding to a price/earnings (P/E) ratio of 15.4 (100 divided by 6.5). At that time, the DAX had a P/E ratio of just over 30. Shares were therefore twice as expensive as bonds. The result was that shares then plummeted, with the DAX losing around 75 percent in the three years to 2003.
“This situation has now completely reversed itself, and it’s actually much more extreme than the situation was in 2000,” said Mr. Grüner. Right now 10-year German government bonds offer returns of just 0.24 percent, representing a P/E ratio of 417. The DAX, meanwhile, has a P/E ratio of 13. According to this calculation, shares are thus more strongly undervalued today than they were overvalued in early 2000.
Many investors and analysts are comparing the current situation to 2008/09, when Germany plunged into its deepest recession in post-war history and more than 50 percent was wiped off the value of the DAX companies.
But this time around there is one big difference: the money in circulation on a daily basis, in other words the M1 money supply, is rising sharply, with current growth rates of 11 percent in the euro zone, 6 percent in the United States and 14 percent in China. Back in 2008, the money supply stagnated or contracted.
Andreas Hürkamp from German bank Commerzbank believes that shares in companies that deal closely with consumers will soon rise significantly, as they will benefit the most from growth in the money supply. The rapid rise in car sales in the euro zone, the United States and China is one indication of this.
The year 2015 was the seventh consecutive year of bullish stock markets. Mr. Grüner describes it as “the least popular bull market in history.” Investors are unable to let go of their underlying skepticism in the wake of the 2008/09 financial crisis. Yet such a sentiment has almost always created the best conditions for a steady rise in share prices, as another adage goes: the more investors are skeptical, the fewer will have already bought shares.
Mr. Grüner believes the current bull market is far from over. “There are many good reasons why we could emerge with significant growth by the end of the year.” Once the upward trend resumes, he even thinks that new highs could be reached. For the DAX, currently a long way from the all-time high it reached in 2015, this would mean an increase of more than 40 percent.
But there are still plenty of skeptics around and downturns on stock markets around the world are weighing on German share prices.
Jochen Stanzl, chief markets analyst at trading platform operator CMC Markets, said he has seen “panic on the global stock markets”, as investors flee into safe havens such as gold and the Japanese yen. “After the share price declines in recent weeks, there are hardly any investors out there with the confidence to get into the market.”
The global gloom is partly because investors are losing confidence in the power of central banks, which in the last few years have stabilized prices on the stock markets through constant intervention.
“The markets are in the process of reevaluating share prices in view of slowing global growth,” said Tim Condon, head of Asia research at ING Group. “Expectations are fading that monetary policies can help.”
Ulf Sommer reports for Handelsblatt on companies and financial markets. Georgios Kokologiannis is an editor with Handelsblatt’s finance desk in Frankfurt. To contact the author: firstname.lastname@example.org and email@example.com