2016 Forecast

Another Bull Year for the DAX?

Which way will the DAX go in 2016?
  • Why it matters

    Why it matters

    The market forecasts, which were mostly on the mark this year, suggest Germany’s stock market is in for another solid year in 2016.

  • Facts


    • 35 analysts polled by Handelsblatt on average expect the blue-chip DAX stock market index to rise 10 percent in 2016.
    • Last year’s average stock prediction proved accurate.
    • The analysts on average expect the euro to weaken further to $1.06 and the 10-year German government bond yield to rise significantly to 0.94 percent.
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Can Germany’s stock market really keep rising for an eighth straight year? Handelsblatt’s traditional end-of-year survey suggests the answer is a clear yes.

Analysts polled by Handelsblatt expect another year of healthy stock market gains in 2016, fuelled by low bond yields and a weak euro that should beat back any geopolitical risks and and fragile emerging markets.

Market experts at 35 German and foreign banks on average predicted a 10 percent rise in the blue-chip DAX stock market index to 11,793 points in what would be the eighth straight year of recovery since the 2008 financial crisis. If that prediction comes true, the DAX index of Germany’s 30 biggest companies will have risen 228 percent since the upturn began in 2009.

While the analysts’ forecasts proved accurate for 2015, many conceded that it’s getting harder to make predictions because U.S. and European interest rates are diverging in the wake of the Federal Reserve’s quarter-point hike on December 16.

Markets are entering new territory, because there’s never been such a divergence over a prolonged period. The rate differentials are set to widen next year with further Fed rate hikes and not the remotest sign that the European Central Bank will depart from its ultra-easy monetary policy.

Despite the ECB’s policies, economists expect a rise in the yield on 10-year German government bonds, or Bunds, to 0.94 percent, a massive 54 percent rise over its current level, but still a low level.

Historically low interest rates combined with the weak euro, which they forecast on average to fall 3.6 percent to $1.06 from the current rate of around $1.10, will help keep stocks attractive, the analysts said.

As the ECB looks destined to keep rates at rock bottom for the foreseeable future, investors have little choice but to switch into stocks.

The Fed’s hike was something of a difficult birth, said Jens Wilhelm, a management board member at Union Investment, one of Germany’s three biggest fund management firms.

“In the end the baby had the right size and weight,” he added. But the market is still volatile because it’s trying to gauge the impact of the rate move. That uncertainty will persist next year, he predicted.

Emmerich Müller, partner in private bank Metzler, said Europe will have to live with low interest rates for a long time to come. “We have a cartel of debtors; they’re not interested in higher interest rates.”

As the ECB looks destined to keep rates at rock bottom for the foreseeable future, investors have little choice but to switch into stocks. With every passing month, relatively high-yielding bonds are maturing, and the money being freed up cannot be re-invested profitably in fixed-income assets.

“Investors will increasingly transfer capital into stocks,” said Carsten Mumm, head of asset management at private bank Donner & Reuschel. He sees the DAX reaching 13,000 points by the end of 2016, which would be an increase of 21 percent.


The Euro-$ Exchange Rate-01


Commerzbank also expects German stocks to remain in a bull market in 2016, arguing that the Fed’s rate stance will remain expansive despite the latest hike. The bank said 24 of the 30 companies listed in the DAX are expected to pay increased dividends and that, at 2.7 percent, the average dividend yield is still two points higher than the yield on 10-year Bunds.

Commerzbank forecasts the DAX at 12,600 points by the end of 2016. Credit Suisse is a tad more optimistic with a forecast of 12,700.

Analysts are upbeat regarding German’s top companies, even on some of the ones going through challenging times.

Average forecasts have been proven right in the past two years. Their prediction of a DAX level of 10,700 by the end of 2015 stood the test of time.

Take ThyssenKrupp, the industrial group which is restructuring to recover from heavy write-downs on its investments in the U.S. and Brazil in recent years. According to financial news agency Bloomberg, 50 percent of analysts have a buy recommendation for the stock. Jason Gammel of U.S. bank Jefferies noted that the company’s cash flow in 2015 was positive for the first time since 2009.

The steel division will likely face downward pressure on margins but the industrial division is expected to boost profits in 2016 and is heavily undervalued. Many analysts see strong upward potential for ThyssenKrupp and on average expect a 20-percent rise in its share price.

Another example is Commerzbank, bailed out by the German government in the financial crisis. It appears to be nearing the end of its restructuring and exceeded analysts’ expectations in the third quarter. The bank plans to pay a dividend for the current year for the first time since 2007 – of 20 cents. It has already set aside the money. Chief Executive Martin Blessing is set to leave, creating an element of uncertainty, but 47 percent of analysts have buy recommendations and expect its share price to rise by almost 27 percent on average in 2016.

Industrial and gases group Linde is projected to gain 22 percent in 2016. To be sure, the company sustained its worst share price slump in 17 years at the start of December when it fell as much as 14 percent. The third profit warning in just over a year surprised and irritated analysts. But at its current level, the stock has found favor again and 45.5 percent have it as a buy, according to Bloomberg. Analysts evidently expect Linde will get to grips with its problems.

Analysts are upbeat regarding German’s top companies, even on some of the ones going through challenging times.

But there are skeptical voices too. Scandinavian bank NIBC expects the DAX to fall 14 percent to 9,250 points next year due to problems in emerging markets, geopolitical risks and centrifugal forces in the European Union that may even culminate in Britain’s withdrawal from the 28-nation bloc.

On average, however, the analysts are far more optimistic: their average forecasts have been proven right in the past two years. Their prediction of a DAX level of 10,700 by the end of 2015 stood the test of time. On Tuesday morning, the DAX was trading at 10,800, up from 9,927 at the end of 2014.

As for bonds, six banks expect the yield on 10-year Bunds to reach 1.10 percent or even higher by the end of 2016. They include NIBC, cooperative bank DZ Bank and regional bank HSH Nordbank.

NIBC said the expected moderate Fed rate hikes next year will fuel speculation that the ECB will at some point follow suit. That, it argues, will lead to a trebling of Bund yields to 1.75 percent by end 2016.

DZ Bank and HSH Nordbank expect the yield to reach 1.20 percent. DZ Bank attributes the gain to “slightly increasing rates of inflation in the euro zone.”

Bankhaus Lampe and Baader Bank, by contrast, expect the yield to fall even lower than current levels due to continued modest global growth and the ECB’s expansive policy. Bankhaus Lampe doesn’t rule out that Bund yields could fall below zero percent, which would be unprecedented. So far, only the yields on German debt up to five years have fallen into negative territory.


German Government Bonds-01


The experts track record here is more mixed – they didn’t get their 2015 bond forecasts right. They predicted a Bund yield of 1.05 percent on average. It’s only 0.61 percent. MM Warburg, Natixis and Nomura got closest, predicting a yield of 0.75 percent. UBS got it wrong with its prediction of 1.60 percent.

At $1.10, the euro is significantly weaker than analysts had predicted for 2015. The Handelsblatt poll for the current year had predicted $1.17, with Hamburg-based Berenberg Bank way off the mark at $1.27. Heleba’s prediction at $1.25 wasn’t much better. Barclays bank with its $1.07 forecast was considerably closer.

Seven banks expect the euro to depreciate to 1-to-1 parity with the dollar in 2016. Deutsche Bank even sees the euro falling to $0.90 due to the widening interest rate differential between the U.S. and Europe.

“This has already lead to strong capital flows out of the euro zone into the U.S. most recently,” said Ulrich Stephan, chief investment strategist for private and corporate clients at Deutsche Bank. He expects the trend to continue.

Barclays, meanwhile, said the better growth outlook for the U.S. economy was the decisive factor strengthening the dollar.

Switzerland’s VP Bank expects the euro to appreciate to $1.20 in 2016. Bank Julius Bär and Bankhaus Hauck & Aufhäuser see it at $1.15. Julius Bär said the euro was “strongly undervalued” due to the divergent monetary policies. As soon as the central banks’ policies start converging again, that undervaluation will lessen step by step.

The $64,000 question is: when will that happen?


Robert Landgraf is the deputy editor of Handelsblatts finance section and is based in Frankfurt. To contact the author: landgraf@handelsblatt.com

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