Investor Angst

The Unloved Market Rally

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  • Why it matters

    Why it matters

    German investors are paying a heavy price for their aversion to buying stocks. Foreign investors — who now own majorities in 19 of 30 DAX firms — are the big winners in Germany’s market rally.

  • Facts

    Facts

    • 54.3 percent of shares in the DAX are held by foreign investors — more than ever before.
    • U.S. investors own one in every five DAX shares.
    • The number of German shareholders as a percentage of the population is 6.5 percent — lower than in any other developed industrial economy.
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German investors have a safety first mentality when it comes to money. Their aversion to risk is often attributed to the economic turmoil of the 20th century. The hyperinflation of the 1920s and the devastation of two world wars have burned themselves into the nation’s psyche.

But this legendary frugality and caution is now costing them dearly.

For decades, the defensive approach to saving, with a focus on all-too-safe bank deposits and government bonds, yielded low but steady modest returns. But in these times of negative interest rates, shunning stocks is a highly risky move.

Holders of bonds with a maturity of up to nine years are actually losing money on their investments. And if you have your cash in a savings account, as most Germans do, you are also losing out because interest rates no longer even offset inflation.

Germans urgently need to review their investment strategies because opportunity cost — in this case the cost of inaction — is rising.

The blue-chip DAX Index of 30 leading stocks has leapt 23 percent this year.

Since early 2009, the share prices of DAX-listed companies have tripled on average — an increase of €800 billion, or $860 billion.

Foreign investors, who are typically more willing to take a risk, are cashing in on this bonanza.

According to calculations by Handelsblatt, 54.3 percent of shares in the DAX are held by foreigners — more than ever before. Consultancy EY puts the share even higher, at 56 percent. The German fear of owning equities, it seems, is even greater than their frustration over underperforming investments.

“Many Germans have parked money in safe investments like savings deposits or life insurance policies,” said Johannes Gareis, an economist at French investment bank Natixis. “That is why the price gains are passing them by.”

According to calculations by Handelsblatt, 54.3 percent of shares in the DAX are held by foreigners — more than ever before. Consultancy EY puts the share even higher, at 56 percent. The German fear of owning equities, it seems, is even greater than their frustration over underperforming investments.

Unlike German investors, foreigners have a nose for top performers. They own 68 percent of industrial gas maker Linde, 73 percent of drugs group Bayer and 75 percent of semiconductor maker Infineon — three German companies whose share prices have outperformed the DAX for years.

“The interest of foreign investors in German top companies has been rising continuously for years,” said Martin Steinbach, an analyst at EY. Germans seem to lack the instinct for stock market winners.

Last year, half a million domestic investors sold their shares.

Since 2001, some 4.4 million Germans have turned their backs on the stock market. The number of shareholders as a percentage of the population stands at 6.5 percent in Germany: That’s lower than in any other developed industrial economy.

And there’s no change in sight, even though analysts see further upward potential in the DAX, whose rally is now in its seventh year. Since March 2009, the index has surged by a staggering 245 percent.

The rise can’t go on forever, of course, and investors would be wise to be cautious in the months to come, with risks including the debt dispute between Greece and the European Union, and the prospect of a U.S. interest rate increase in the summer or fall.

But there are strong arguments for continued gains.

Interest rates in the euro zone are likely to remain very low for a long time, and the European Central Bank is fueling markets with a massive liquidity injection, purchasing €60 billion worth of government bonds and other securities per month up to September 2016.

The ECB’s quantitative easing alone should feed the stock market rally for quite some time, as the example of the United States shows.

Christian Funke of Source For Alpha, a Frankfurt-based investment managing firm, and Matthias Habbel of asset manager Habbel, Pohlig & Partner, analysed the market impact of the third round of the U.S. quantitative easing program and found that the U.S. stock market rose more than 30 percent after it was announced in September 2012.

 

Loving German Stocks- DAX foreign ownership April 2015

 

Transferring that to Germany, the analysts said the DAX, currently hovering around 12,000, has room to reach almost 14,000.

“Now at the very latest is the time to start investing differently,” said Dirk Müller, a well-known German stockbroker and author. “In the long term, there’s no way around real assets like stocks.”

Over the long term, shares are among the best and most sensible forms of investment for building up wealth and securing it — despite all the volatility.

“The Anglo Saxons in Britain and America have a totally different approach; they’re much braver and more risk-friendly,” Mr. Müller said. “To them, setbacks are an opportunity to get into a stock or buy more. The Germans are very scared of losses.”

He doesn’t expect that to change.

The few times that ordinary Germans dabbled in the stock market, such as with the flotation of Deutsche Telekom in 1996 or in the dot.com bubble in the late 1990s and early 2000s, they got burned.

“These bad experiences are one reason why Germans are missing out on their rally,” said Mr. Müller.

It was the center-left government of former Chancellor Gerhard Schröder which opened the German stock market to foreign investors.

In 2000, the government freed stake sales from capital gains tax and thereby triggered the dissolution of Germany Inc. — the web of cross-shareholdings between banks, insurers and top industrial companies that had provided stability during the post-war economic miracle, but had become outdated and inflexible.

The few times that ordinary Germans dabbled in the stock market, such as with the flotation of Deutsche Telekom in 1996 or in the dot.com bubble in the late 1990s and early 2000s, they got burned.

Finally, after decades of stagnation, companies were free to offload capital stakes, and foreign investors rushed in. Insurer Allianz, one of the main pillars of Germany Inc., sold some 2,000 shareholdings worth €30 billion over a decade.

Yet the number of German shareholders has fallen by around a quarter since the tax change. The decline in German ownership of DAX companies has been even greater — from just over 60 percent in 2000 to just 40 percent now.

U.S. investors are the biggest single group of foreign investors. Every fifth DAX share is owned by North American investors led by New York-based Blackrock, the world’s biggest asset manager which owns 6 percent of the DAX.

For foreign investors, all that matters is the prospect of a good return in terms of price gains and dividends. Germans, by contrast, seem to be driven by selfless loyalty.

Many small investors have held on to shares they bought in telecoms giant Deutsche Telekom even though its share price has dropped 84 percent since 2000.

At least 19 of 30 DAX companies are currently majority-owned by foreign investors. The exceptions are companies with established strategic shareholders such as consumer products maker Henkel, drugs giant E. Merck or carmaker Volkswagen.

Another exception are firms where a foreign majority is banned by law — such as national airline Lufthansa. Not that foreign investors are likely to fret too much about that: Lufthansa is the worst performing share in the DAX with a 34 percent drop over the last 12 months.

 

Ulf Sommer is a Handelsblatt editor in Düsseldorf who writes about companies and markets, finance and other news. To reach him: sommer@handelsblatt.com

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