The DAX, Germany’s leading stock market index, hit a new high of 12,976 on Wednesday morning, beating the previous record set on June 20, in a fresh sign that its long-term rally remains intact. The benchmark index then closed at a record-high of 12,970.52.
Although the DAX inched lower on Thursday, hovering about 12,950 by mid-morning, investors are confident that the party isn’t over. “The new record isn’t the end of it for the DAX,” said Benjardin Gärtner, head of equity funds at Union Investment. Ralf Zimmermann, equity strategist at Bankhaus Lampe, predicted that the DAX would crack 13,000 this month.
Tim Albrecht, head of equities for Germany at Deutsche Asset Management, the investment unit of Deutsche Bank, said the DAX could move towards 14,000 next year. Martin Lück, chief capital markets strategist for Germany and Eastern Europe at Blackrock, agreed, saying it was “quite realistic” that the index might add 1,000 points by the end of 2018.
“Compared with the US, European and German stocks are still cheaper.”
Just a few weeks ago, few analysts dared to be that optimistic. In August, the DAX had even slid below the 12,000 mark due to the surprising strength of the euro, fears of a monetary policy tightening by the European Central Bank and tensions between North Korea and the US.
But sentiment recovered rapidly because the arguments in favor of further gains were simply too strong. “Economic leading indicators point to a global upturn,” said Mr. Albrecht.
And Europe’s economic recovery is exceeding expectations, with the latest purchasing managers’ indices for the euro zone reaching a four-month high and heralding strong corporate earnings for the third quarter.
If inflation stays low and the ECB takes its time tightening policy, share prices could rise in line with corporate earnings, said Mr. Lück at Blackrock. That would translate into a 10 percent gain for European stocks in 2018.
But the trigger for the latest gains came from the US where share prices have surged on strong economic data and hopes that President Donald Trump will implement his tax-cutting plans.
European shares also have an advantage that makes them especially attractive at the moment. “Compared with the US, European and German stocks are still cheaper,” said Mr. Zimmermann of Bankhaus Lampe.
Investors in the S&P 500 index are currently paying 19 times projected earnings for 2017. The ratio for the DAX is just 14. German stocks are also attractive compared to their European peers. “Based on earnings estimates for the coming year the German stock market continues to trade at a discount of 8 percent against the broader European market,” said Maximilian Kunkel, chief investment strategist for Germany at UBS Wealth Management.
In addition, the euro, which had weighed on European stocks by appreciating to above $1.20, has retreated of late.
But despite all the euphoria, there are some risks attached to this latest rally. While the political crisis in Spain surrounding Catalonia’s independence vote isn’t expected to have much lasting impact, the US could drag on share prices if Trump fails yet again to deliver on his election pledges.
US stocks are already expensive, the Federal Reserve is expected to keep on hiking interest rates and if his tax reform, like other promises he made in the campaign, fails to materialize, the S&P 500 could suffer double-digit losses, said Mr. Zimmermann. “That would weigh heavily on the DAX as well.”
Other experts see political risks, and especially the crisis between the US and North Korea, as the main drag on the DAX — but sharp downturns would only happen if the situation escalated.
Despite the upbeat mood, equity strategists recommend picking stocks carefully. Investors should spread their risk by placing their capital broadly over industries and regions, said Mr. Gärtner of Union Investment
Engineering and chemicals offer the best upside right now because they’re export-heavy, meaning they’re profiting from the global upturn, said Mr. Lück.
Industrial stocks in general are likely to do well thanks to growing global investment, said Mr. Zimmermann of Bankhaus Lampe. He added that financial stocks were a better bet than real estate because interest rates are on an upward trajectory.
Anke Rezmer covers the investment fund industry for Handelsblatt out of Franfurt. Susanne Schier heads the private investment team at Handelsblatt’s Frankfurt finance desk. Jean-Michel Hauteville and David Crossland adapted this article for Handelsblatt Global. To contact the authors: firstname.lastname@example.org, email@example.com.