Goodbye, 2017

A year of surprises on Germany’s stock market

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Many of the best and worst performers in 2017 were a surprise, even for analysts. Source: Christoph Schmitt for Handelsblatt Global

The past year offered investors plenty of surprises. In the age of Donald Trump, sound economics seems to have trumped political uncertainty, as an ongoing boom in the world’s stock markets continued to exceed analysts’ expectations. Some individual stocks have posted astonishing results in 2017, including some that were on nobody’s radar at the beginning of the year. (Think Bitcoin.)

Germany was no different. In politics, the country has tumbled into uncharacteristic uncertainty. A government is still not in place, three months after an uncertain election result in September. And yet, 2017 was a good investment year. The DAX, Germany’s leading stock market index, increased in value by around 14 percent. The smaller associated indexes — the MDAX, SDAX and TecDAX — all returned even stronger growth.

Next year could have a similar story, buoyed by solid company earnings and a steadily growing economy. A poll of 32 banks by Handelsblatt found the average prediction is that the DAX will rise another 7.4 percent next year — passing the psychological mark of 14,000 for the first time in its history. (The DAX is currently sitting at just under 13,000.) If history is our guide, that would be pessimistic: Most analysts predicted the DAX would flatline this year.

While the overall trend may be up, the results for individual companies varied widely. This year’s big surprise came from an airline: The German flag carrier, Lufthansa, saw its share price soar by more than 150 percent. This left many analysts with egg on their faces: A year ago, 60 percent of analysts polled by Handelsblatt recommended selling the stock, expecting average declines of 15 percent. Broadcaster ProSiebenSat.1 was the analysts’ darling 12 months ago. But the stock was the DAX’s worst performer in 2017, dropping more than 20 percent.

Such failures won’t stop analysts from making predictions for next year, so take what we write here with a grain of salt — as you should any financial advice. Insiders often recommend that investors stick with winners in the hopes that a track record of solid profits and regular dividends will translate into continued growth. But then, betting that losers will turn things around can also lead to success. In that spirit, here’s our review of the winners and losers of the year.

28 p32 Stock winners 2017-01

In fact, Lufthansa has had a spectacularly good year, above all helped by the bankruptcy of rival Air Berlin. This has left the major German airline in a powerful position, without serious competitors in the domestic airline market. Moreover, after several years of labor disputes, peace appears to have broken out on that front. But after such tremendous growth in 2017, many observers see the stock’s further growth potential as limited in the short term.

By contrast, the DAX’s second-best performer is a much tougher nut to crack for analysts — especially when it comes to predicting the future. Commerzbank, Germany’s second largest bank, saw its share price soar more than 70 percent. The reason, however, has more to do with takeover speculation than with anything Commerzbank has done itself: Banks ranging from Deutsche Bank to Switzerland’s UBS to Italy’s Unicredit have all been linked with a possible bid. That could make 2018 a year of decisions for the bank — and an uncertain one for shareholders.

After years of struggling with a government-mandated transition to renewables, 2017 has also been a surprisingly happy year for German energy companies. Top of the list is Uniper, which was formed in January 2016 when energy giant E.ON spun off its fossil fuel assets into a separate company. Since then its share price has come close to a record high, making it the best performer in the mid-cap MDAX index. Like Commerzbank, this has as much to do with a possible merger as with its own performance: Uniper is the target of a takeover attempt by Finnish rival Fortum, and has also seen buy-in by more than one US activist investment fund. Uniper itself is fighting the Finnish bid, setting the scene for a monumental takeover battle in the new year. Whatever the outcome, existing Uniper investors should do well.

Germany’s traditional energy firms also enjoyed good years. E.ON and RWE were among the DAX’s top five performers. But Markus Wallner, a share strategist with Commerzbank, says E.ON prospects are less rosy for 2018: “We think that the Federal Reserve (the US central bank) will raise rates three times in the coming year. This will exert downward pressure on stocks of heavily indebted companies,” he said. E.ON’s balance sheet contains plenty of red numbers: Its net debt is currently four times its operating earnings before interest, taxes and depreciation.

28 p32 Stock losers 2017-01

On the losing side, if you haven’t heard of ProSiebenSat.1, you probably don’t need to start now. Any quick turnaround in fortunes for the German television group seems unlikely: The media business is suffering from rapid changes in habits among television viewers, and ProSiebenSat.1 has struggled to keep up. For Uwe Streich, an analyst with the bank LBBW, the broadcaster could even be expelled from the DAX, which holds the country’s 30 most valuable companies, when the index is next recalculated in September.

Health care companies also fared poorly. Fresenius was one of the year’s big losers on the DAX, declining around 12 percent, followed by pharmaceuticals firm Merck. In a recent Handelsblatt interview, Fresenius CEO Stephan Sturm said he was worried by the poor performance of the share price. The stock has above all suffered from concerns about the planned takeover of American generic drugmaker Akorn: Analysts fear the German company may be overpaying. Still, market watchers are more divided on the company’s potential for 2018. “Fresenius offers little in the short term, but for longer-term investors it offers attractive potential,” said Ulrich Huwald, an analyst at Warburg Research. The company’s dividend record — raised for the 25th time in succession — is another factor that could attract investor interest.

If you haven't heard of ProSiebenSat.1, you probably don't need to start now.

Germany’s MDAX, which indexes non-technology companies just outside the DAX, has long been a promising alternative for savvy investors because it houses some of the country’s most reliable exporters. But a look at the year also highlights the serious pitfalls. While Uniper is riding high, perhaps the biggest German stock story of the year concerned Steinhoff, the international furniture group that is second in size only to Sweden’s Ikea. It’s potential was clear — until the company admitted serious accounting irregularities a few weeks ago. Now its future is in tatters and its share price has collapsed, down 94 percent, by far the biggest loser across all of Germany’s main stock market indexes. Any quick recovery seems unlikely.

On the positive end, another strange story of the MDAX this year has been Stada, a pharmaceutical company that has surged on the back of interest from some activist foreign investors bent on making their mark — a common refrain for many German companies this year. Look for activist investors to continue trying to shake up stale German management in 2018.

While the MDAX is already complicated enough, adventurous investors will have done well to go even smaller in 2017. On the small-cap SDAX, the index comprising Germany’s top 50 small and medium-sized firms, the top performer has been German machinery firm Wacker Neuson. That’s largely because its subsidiary Kramer teamed up with John Deere earlier this year. On the downside, investors in the more internationally known fashion retailer Gerry Weber will have been disappointed. The retailer, which has been slimming down since 2016, looked as if it could lose its place in the SDAX. Although it lost about 16 percent over the course of 2017, the biggest fall on the index, for the moment its place seems more secure.

Across of all the main indices, the very best performers came from the TecDAX, the technology stock index: Aixtron, a semiconductor manufacturer, posted growth of 294 percent. Part of the reason is simply that it didn’t go bankrupt, as many had feared after a Chinese takeover bid was blocked by the government in 2016. Another outlier was Siltronic, a specialty silicon maker, which saw its share price rise 180 percent over the year. But views differ on the future of these two top performers: analysts see more growth to come for Munich’s Siltronic, but a majority advise owners of Aixtron stock to take profits now.

Susanne Schier heads the private investment team at Handelsblatt’s Frankfurt finance desk. Christopher Cermak is an editor at Handelsblatt Global in Berlin. To contact the authors: schier@handelsblatt.com and C.Cermak@vhb.de

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