Bargain hunters need to be patient. Although the German stock index, or DAX, has fallen 1,000 points from its all-time high in June, experts say it’s too early to expect prices to bottom out. With prices expected to weaken even further in the coming weeks, investors would be well advised to use financial instruments like put options to make a trading profit.
“Based on long-term averages, September is the weakest month in markets,” said Markus Reinwand of Frankfurt-based bank Helaba. Since its launch in 1988, the DAX has lost an average of 2.8 percent in September, much more than in any other month. September 2002 was the DAX’s weakest month ever, with shares losing more than 25 percent of their value.
Technical analysts are particularly wary this year as the DAX index recently slid below the so-called 200-day line, the index’s rolling average over that period. According to experts at DZ Bank, the DAX could now drop from its current 12,000-point mark to around 10,800.
The current appreciation will weigh down the sales and profit figures of DAX companies in the third and fourth quarters.
The DAX is currently valued almost a tenth higher than it was on average of the past ten years. A Handelsblatt analysis of important valuation figures – price-earnings (P/E) and price-sales (P/S) ratios – suggested the stocks are trading 10 percent higher than corporate performance should allow. Markets can end this overvaluation in two ways – by sending stock prices down, or by seeing valuations affirmed by strong corporate operating results.
But this latter option is currently unlikely, according to French bank BNP Paribas. Only a few industries in Europe have fallen short of expectations recently when it comes to corporate earnings: “But sales are a different story. Seven industries have reported lower-than-expected results, while sales were in line with or above expectations in only eight industries.”
While companies can influence their profits with special effects or balance-sheet cosmetics, it isn’t as easy to enhance sales – especially in a period in which the value of the euro is rising. “The current appreciation will weigh down the sales and profit figures of DAX companies in the third and fourth quarters,” said Joachim Schallmayer, Dekabank’s head of capital markets.
The last time the exchange rate changed so dramatically in such a short time was between the end of 2014 and mid-2015.
The euro’s rise means many companies’ export outlooks are becoming murkier. The common currency has gained about 16 percent since early January to reach $1.20, its highest level in two-and-a-half years. The last time the exchange rate changed so dramatically in such a short time was between the end of 2014 and mid-2015. At that time, the euro lost 16 percent in value at the time, and companies reported a surge in sales in the second quarter of 2015.
A similar move could now be on the cards – just in the opposite direction. “The DAX companies generate about 50 percent of their sales in the dollar area or in currencies that are tied to the US dollar,” said Mathieu Meyer, a member of management at consultancy EY. According to Mr. Meyer, it is very likely the appreciation of the euro will curb companies’ sales growth.
Market watchers are bearish as a result: Fidelity fund manager Christian von Engelbrechten expects corporate profit growth to slow by at least half; analysts at Bantleon asset management expect the DAX to shed 1,000 points by year’s end. Christian Apelt, strategist with Helaba, says: “The DAX correction was overdue, but it probably isn’t over yet.”
Georgios Kokologiannis is a stock-market correspondent for Handelsblatt in Frankfurt. To contact the author: Kokologiannis@handelsblatt.com