This month, the specialty chemicals group Lanxess will be relegated from the premier league of German companies, the DAX index of 30 leading shares, and replaced by property company Deutsche Annington.
This is a trend being seen around the world. Central banks pour more and more cheap money into “concrete gold”, as real estate has been dubbed. Nowhere are prices rising faster than in the property sector. Anyone, like the central bankers, who complain about a lack of inflation, should just buy a house – the problem will be solved.
The glut of money that once again boosted stock markets following the European Central Bank’s meeting on Thursday, together with the explosion in property prices, is benefiting real estate companies, and thus their share prices. They are becoming more valuable and as a result are being promoted to the top segment of the stock exchange.
But Annington’s rise stands for more than that. The latest rotation in Germany’s stock market indices is typical of the DAX, which reflects the state of the global economy much more strongly and accurately than they reflect the ups and downs of the German economy.
When economic data from China or the United States flashes up on the news tickers, the DAX is guaranteed to react.
Investors witness this spectacle on almost a daily basis, such as when the purchasing managers’ index for Chinese industry or the Chicago Purchasing Managers’ Index determines the fortunes of Germany’s stock exchange. Meanwhile, German gross domestic product, leading indicators from Germany’s Ifo Institute for Economic Research and Centre for European Economic Research and order intake in German industry have no influence at all on the market.
The 30 companies in the DAX achieve only a third of their sales in Germany.
If you find this surprising, you should look at the composition of the DAX and the shareholding structure of its 30 members. Only one-third of share capital entitled to voting rights is still in German hands, while the rest is abroad, particularly in the United States.
There are 20 times as many shareholders there as in Germany. The value of portfolios held in the world’s biggest economy is almost 50 times as high. Next to it, Germany is a developing country in terms of shareholdings.
It should therefore surprise no one if the few remaining German investors pay more attention to market developments in the United States, the country in which the stock market was invented, than to trading in Frankfurt.
Irrespective of the country of origin of shareholders, however, investors will be doing the right thing if they judge German shares not so much according to German economic data as on the basis of global economic data.
Most DAX companies are global groups with head offices in Germany. Overall, the 30 companies in the DAX achieve only a third of their sales in Germany; in the case of sportswear group Adidas, industrial gas specialist Linde, Fresenius Medical Care and Heidelberg Cement, this figure is under 10 percent. What have German growth figures got to do with anything?
German chemicals group BASF, for example, is now regarded worldwide as a reliable barometer of the development of the global economy. As the Ludwigshafen-based company’s products are in demand in virtually all branches of industry, BASF feels the effects of changes in the economic environment in its order books at an early stage.
That doesn’t just apply to BASF and industrial groups like Linde and carmakers BMW, Daimler and Volkswagen. Even second and third-tier companies are now generating two-thirds of sales abroad. There are barely any international automotive manufacturers that do not use industrial robots from Augsburg-based supplier Kuka.
Brenntag, a company based in Mülheim, has become the world’s biggest chemicals trader, while Rational in the town of Landsberg is a world leader in its niche, supplying equipment for large kitchens in schools, universities and hospitals.
That’s why investors are acting rationally and efficiently by looking first and foremost at international economic data and giving less priority to national data – with all the associated consequences. As soon as prospects for the global economy improve, as they did after the large crisis in 2009, the DAX gets a boost, just because a lot of investors are banking on it at the same time.
The flip side is that as soon as economic sentiment deteriorates, as happened in 2007, or threatens to deteriorate, as it has done in the last few weeks, the DAX is hit particularly hard. As soon as the prospect of a downturn becomes apparent, many investors switch sides simultaneously and withdraw from the DAX.
What’s more, the more investors jump on these recurring trends, the more wildly Germany’s stock market barometer will vacillate, both up and down. This will please speculators, but will bring stress to investors who want the markets to remain calm and to fluctuate as little as possible. For them, the DAX is not the best place to be.
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