Investors are losing faith in the rally that took German equities to records 27 times this year, withdrawing money from the market at the fastest pace since 2012.
The DAX Index is among the worst-performing gauges in developed markets this month, led by slumps in Volkswagen AG and BMW AG. After surging this year on bets a weaker euro will benefit exporters, the measure has fallen 4.6 percent from its April 10 peak. Traders have pulled almost 3.4 billion euros ($3.7 billion) in about two weeks from the biggest exchange-traded fund tracking German shares, according to data compiled by Bloomberg.
Now that the currency has stabilized and some economic reports have fallen short of forecasts, investors may be concerned the rally went too far, according to R&A Research & Asset Management’s Otto Waser. Reports in April showed services and manufacturing in Europe’s biggest economy slowed, factory orders unexpectedly dropped and investor confidence fell for the first time in six months.
“The market had gone far, and any sort of trends that are threatening the blue-sky scenario invite profit-taking,” said Waser, chief investment officer of R&A in Zurich. “Few people would allocate fresh money at this stage of the rally.”
A jump in automakers helped push the DAX up 26 percent this year through its April record. Since then, Volkswagen has slumped 8 percent and BMW has lost 5.9 percent as the companies struggle to expand in China, the largest market for cars. Allianz SE, Europe’s biggest insurer and asset manager, cautioned investors against possible stock-market turmoil.
The rally sent the DAX valuation to 1.9 times the estimated book value of its members. That’s 15 percent higher than the multiple for Euro Stoxx 50 Index companies. German shares last month reached their most expensive levels in at least a decade relative to those in the region.
As the quarterly earnings season takes off, investors will get cues on how much the euro has helped German firms. SAP SE, the only DAX company to have reported results so far, posted sales that beat analysts’ estimates as the weaker currency boosted revenue from the U.S. and other markets.
“It’s time to see whether the currency weakness, which spurred this equity-markets rally, is actually translating into better earnings,” said Christian Gattiker, head of research at Julius Baer Group Ltd. in Zurich. “A lot of this earnings recovery is already priced in.”
Some investors are looking elsewhere, backing regions whose stocks are yet to climb as much as Germany’s. James Butterfill, the head of global equity strategy at Coutts & Co. in London, said his firm cut its allocation to German shares, investing in Spanish and Italian equities instead. While the DAX surpassed its 2007 high almost two years ago, the IBEX 35 Index and FTSE MIB Index would still have to rally more than 38 percent to reach their peaks from that year.
“Valuations are becoming a bit challenging,” said Butterfill, who helps oversee about $12 billion in equities, referring to German shares. “PMI data suggest that actually a weaker euro isn’t as positive an impact as analysts expected.”