German Stock Market Pain Seen Just Beginning Should Greece Exit

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The tumble in German stocks has already breached a level that constitutes a correction and could go another 10 percent should Greece exit the euro.

So say Ralf Zimmermann of Bankhaus Lampe KG and UniCredit Bank AG’s Christian Stocker, who forecast the DAX Index could slip as low as 10,000. Even in a more likely scenario where Greece and its creditors compromise, the decline probably isn’t over and the benchmark gauge may hit 10,500, Zimmermann said.

A rebound in the euro coupled with losses in German bunds has made the DAX the second worst-performing index among developed markets this quarter. Now Greek debt negotiations are stalling, and European officials are preparing for a potential default and exit from the euro.

“The deadline is approaching, and it’s crunch time,” said Zimmermann, an equity strategist at Bankhaus Lampe in Dusseldorf. “The move from mid-April was driven by the crash in the German bond market. If there is a Grexit, that would be an add-on.”

German equities have more at stake after the nation’s index more than tripled from a low in 2009 through a record in April, while the Euro Stoxx 50 Index just doubled. A level of 10,000 would mark a 19 percent drop from the DAX peak. The gauge lost 1.9 percent Monday to its lowest level since Feb. 18.

Growing Despair

Greece needs to come up with a set of financial reforms that its creditors will deem satisfactory to unlock further bailout aid, with its current rescue package expiring at the end of the month. The nation already missed an International Monetary Fund payment this month, and the lender’s delegation voiced despair of Prime Minister Alexis Tsipras’s negotiation tactics.

While UniCredit Bank’s Stocker sees the DAX at risk, he also says potential declines would be temporary. With the European economy gaining strength, 10,000 would be a buying opportunity. Such a level would send the DAX valuation to 12.6 times projected earnings for this year -- the lowest since January, data compiled by Bloomberg show.

“A Grexit would only pause the overall positive equity-market development during the summer months,” Stocker said. “The spillover effects of a possible Grexit are much less compared to two to three years ago.”

Even as a gauge tracking volatility expectations on the DAX has climbed 50 percent from a low in February, it’s near a two-month low relative to a measure of Euro Stoxx 50 swings.

Still, even a compromise that entails ongoing formal euro membership for Greece may create enough jitters to hurt German shares, according to Zimmermann.

“Investors have thought there would finally be a solution,” he said. “But you could argue with capital controls and a parallel currency, that this would be the early sign for a Grexit in the longer run. And of course, many have believed promises by politicians and the European Central Bank that such a thing would never happen. There is still downside risk for markets.”

Fore more, read this QuickTake: The Euro

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