DAX Rally

Germany's Teflon Stock Index

bull market frankfurt stock exchange june 2014 source dpa
German equities are up by about 15 percent on average this year, and most analysts expect the stock market to go higher during the DAX bull summer.
  • Why it matters

    Why it matters

    German blue chip shares could offer attractive returns at a time of record-low interest rates.

  • Facts


    • The DAX, an index of Germany’s 30 leading blue-chip companies, has already climbed 15 percent this year.
    • Experts warn that there could be considerable volatility ahead.
    • China’s flagging growth has weighed on German stocks.
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Germany’s benchmark DAX stock index would appear to be made out of Teflon: it was barely hit this week by the stock market crash in Greece. Last week, even plummeting prices in China had little impact.

There’s no trace of crisis in Germany’s financial capital, Frankfurt. On the contrary, 2015 could be a good year for German equities. The DAX, an index of Germany’s 30 leading blue-chip companies, has already climbed 15 percent and could surge higher in the coming months, according to the latest forecasts by equities analysts evaluated by Handelsblatt.

Many stock strategists have raised their targets for German large caps: Private banks Hauck & Aufhäuser and Bankhaus Lampe are the most optimistic, seeing the DAX at near 12,100 points by year’s end. That would be an increase of around 4.5 percent from current levels of 11,580.

“We haven’t seen the top of the stock cycle yet,” said Ralf Zimmermann, an equities strategist at Düsseldorf-based Bankhaus Lampe, who raised his yearly DAX forecast from 11,000 points in June.

Such optimism is surprising considering the dangers lurking in the financial markets: China’s flagging growth, Greece’s festering euro and bankruptcy crisis and the U.S. Federal Reserve’s impending interest-rate hike could all spoil the stock market party.

So is the optimism unfounded?

“The recovery in Europe is moving forward in big steps”

Karsten Stroh, JP Morgan

No, said Reinhard Pfingsten, an equity analyst for Hauck & Aufhäuser in Frankfurt. He explained that the European Central Bank’s bond-buying program and the weaker euro had improved Europe’s economic and profit potential, which is why he too had hiked his 2015 DAX forecast by 1,500 points from the 10,600 points he expected last December.

Henning Gebhardt, the chief equity strategist for Deutsche Asset & Wealth Management in Frankfurt, noted similar reasons for boosting his forecast from 11,100 points to 11,700.

Karsten Stroh at JP Morgan is also convinced that stock markets in Europe, in particular in Germany, have potential to climb higher. He added that he expects growth to pick up in Europe next year as well.

“The recovery in Europe is moving forward in big steps,” Mr. Stroh said. “The underlying factor is corporate profits, which should determine share price developments. For the first time in a long time, company profits are showing positive growth rates.”



So it’s no surprise that banks are also expecting higher prices for top European stocks. Private bank Hauck & Aufhäuser sees the Euro Stoxx 50, an index of euro-zone, blue chip shares, rising to 3,800 points by the end of the year; Bankhaus Lampe sees it at 3,725. The index is currently at 3,650 points.

Dekabank in Frankfurt is also bullish on the DAX, putting it at 12,000 points by the end of 2015. It expects the Euro Stoxx 50 to hit 3,750 points. However, the bank’s chief economist Ulrich Kater has yet to adjust those forecasts.

Mr. Kater noted that he never expected the latest Greek debt crisis to adversely affect European stocks for long.

“Whether we’re also right about the worldwide growth dip being ironed out this year, providing a sufficient basis for the stock market, remains to be seen,” he said.

The bank Sal. Oppenheim, a subsidiary of Deutsche Bank, sees potential for the DAX to rise by 3 percent this year.

“But the way there will be very volatile,” said Lars Edler, the head of investment at the Cologne-based private bank.

Investors got a taste of that volatility during the dramatic negotiations over Greece earlier this summer, as shares around the world dipped when it looked like Greece was headed for a euro exit.

Analysts noted however that the possibility of a “Grexit” did not provoke the kind of stock market crash that some had predicted  – it was more like a course correction.

“The correction in April was overdue and the Greece crisis was a good reason for many investors to take profits,” said Benjardin Gärtner, director of equities portfolio management at Union Investment in Frankfurt.

Still, a renewed flare-up of the Greece crisis is just one of several risks that could reverse the stock market’s gains. Geopolitical instability in the Middle East and the slowing growth in emerging markets are other dangers, but it’s China’s economic slowdown that has many experts worried.

A dramatic fall in gold prices and raw materials have also been a cause for concern, not to mention the possibility that inflation in Europe will remain dangerously low.

“The signals from raw materials markets, the gold price and inflation expectations don’t look so good,” said Dekabank’s Mr. Kater.

Adreas Hürkamp, equities strategist for Commerzbank in Frankfurt, said China has also already played a role: “The China worries have led to an enormous markdown in valuation in the DAX.”

Compared to the S&P 500 and the Euro Stoxx 50, German blue-chip stocks are a better value, Mr. Hürkamp said. While the DAX has an average price-earnings ratio of 13, European big caps have a ratio of 15 and major U.S. stocks hit 17.

Mr. Hürkamp sees the DAX hitting 11,800 by the end of the year. But should China’s central bank manage to stabilize the country’s economy, “then the DAX will become the most interesting index and recoup its markdown in valuation.”

Still time to buy in? Source: Bildstelle
Still time to buy in? The DAX in Frankfurt is poised to rise further this year, many analysts expect. Source: Bildstelle


Another central bank, the U.S. Federal Reserve, could end up weighing on equities should it, as expected, raise interest rates off their record lows later this year. But here too financial analysts are relatively sanguine about the risks.

“The monetary authorities have, however, prepared the markets relatively well for this step, so the interest rate reversal might cause a bit of turbulence, but no long-term price drop,” said Mr. Gärtner of Union Investment.

Even if the experts are right, and the DAX posts solid gains in the second half of the year, investors will still need strong nerves.

“Volatility on the German stock market has risen to a level not seen since 2012,” said Mr. Kater of Dekabank.

In light of the risks present, nobody believes that is likely to change any time soon.


Jessica Schwarzer is chief stock market correspondent. To contact her: schwarzer@handelsblatt.com

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