DAX Peeks Above 10,000 With Bull Market Enticing Converts

Less than three years after the Greek debt crisis sent the DAX Index plunging 30 percent over 47 days, confidence is being restored to Germany’s stock market.

Helped by economic growth that is twice as fast as the euro area’s, the benchmark gauge briefly surpassed 10,000 for the first time yesterday after the European Central Bank announced a stimulus package. The threshold was crossed after U.S. investors poured $142 million into an exchange-traded fund tracking German shares last month, reversing withdrawals that began in February.

Optimism is growing in the region’s largest economy after Chancellor Angela Merkel helped preserve the euro and rising household demand boosted gross domestic product. The DAX, a total-return index that reflects dividend gains, has climbed 171 percent since global stocks bottomed in March 2009, beating France, the U.K. and Switzerland.

“Back in September 2011, no one would have thought that the DAX would double and exceed the 10,000 mark in less than three years,” Ralf Zimmermann, an equity analyst at Bankhaus Lampe KG, said in a phone interview. “This shows the strength of the German economy and its companies. As long as growth continues in the globe, the DAX will drift upwards.”

Valuation Appeal

Even after the rally, German stocks remain 20 percent cheaper than at their peak in 2009, trading at 13.8 times estimated earnings, data compiled by Bloomberg show. By comparison, the Standard & Poor’s 500 Index, which has climbed 221 percent during the bull market including dividends, trades at 16.4 times the projected profit of its constituents.

Continental AG, the region’s second-largest auto-parts maker, and carmakers Volkswagen AG and Bayerische Motoren Werke AG are among the biggest gainers on the DAX since the gauge’s March 2009 low, rising more than fourfold each. Infineon Technologies AG, Europe’s second-largest semiconductor maker, has surged 25-fold since then, leading the gains.

“Over the last several years, German companies have done their homework -- they are lean, clean and focused on cost-cutting and efficiency,” Matthias Jasper, head of equities at WGZ Bank AG in Dusseldorf, Germany, said by phone. “During the debt crisis, Germany was seen as rock solid. For safety reasons, a lot of people channeled their investments towards Germany.”

Merkel’s Mission

Merkel emerged as a continental leader during the euro-area crisis that sent the DAX from 7,253 on July 27, 2011, to 5,072 by Sept. 12. The German premier has been supported by ECB President Mario Draghi, who said in July 2012 that policy makers would do whatever was needed to preserve the euro.

Draghi cut the ECB’s lending rate yesterday, took the deposit rate below zero and opened a 400-billion-euro ($542 billion) liquidity channel to boost bank lending. He also said policy makers will start work on an asset-purchase plan.

“The ECB announcement today has been a watershed to the extent that it’ll weaken the euro going forward,” Chris Konstantinos, who helps oversee $4.6 billion as director of international portfolio management at Riverfront Investment Group LLC in Richmond, Virginia, said in a phone interview. “That should be a very good thing for Germany because they’re export-focused.”

Investors Return

U.S. investors returned to Germany in May after pulling $574 million from the iShares MSCI Germany ETF in the previous three months, data compiled by Bloomberg show. The exchange-traded fund tracks companies from Bayer AG to Siemens AG and Daimler AG.

The redemptions came amid rising tensions between the U.S. and Russia over the future of Ukraine, a crisis that has eased after Ukraine held a presidential election. Group of Seven leaders have spared Russia more sanctions, urging it to complete the pullback of its troops from the country’s border.

The German economy, after contracting in 2009, has grown more than 0.4 percent each year and will increase 2 percent in 2014, according to the median economist forecast in a Bloomberg News survey. The euro area ended its longest-ever recession in 2013 and will expand 1.1 percent this year, the estimates show.

Germany has shown signs of weakness this year. First-quarter export growth trailed estimates, while unemployment unexpectedly increased in May. It would need a weaker euro to reverse the trend, Michael Block, chief strategist at New York-based Rhino Trading Partners LLC, said.

‘Knee-jerk’ Reaction

“The ECB action today has investors hoping that a weaker euro can boost exports for the second half,” Block said via a message. “Whether that plays out or not remains to be seen but the knee jerk is to buy Germany on these aggressive actions. Merkel continues to talk about keeping the currency strong but she quietly smiles at anything that could help German exporters.”

Europe’s shared currency strengthened 0.5 percent to $1.3660 at 5 p.m. New York time yesterday, the biggest jump on a closing basis in three months. It climbed on May 8 to $1.3993, the highest since October 2011.

The DAX has probably come too far given the challenges the economy faces, according to Christian Schmidt, an analyst at Helaba Landesbank Hessen-Thueringen in Frankfurt. The Bundesbank has said the nation’s expansion this quarter is unlikely to match the pace of the first three months, which was boosted by unusually warm weather.

“Investors are overconfident at this point,” Schmidt said in a phone interview. “All the positive influences are priced into the market at the moment. A correction is more likely than a further big extension.”

Earnings Outlook

Still, earnings at DAX companies will probably jump 23 percent this year to 718.29 euros a share, according to the average analyst estimate in a Bloomberg survey. Since 2009, they’ve increased every year except for 2013, the data show.

Bayer posted first-quarter profit that increased 12 percent, beating analysts’ estimates, as new medicines drove growth. BMW, the world’s biggest maker of luxury cars, forecast “significant” gains in 2014 profit after posting a 4.2 percent increase in earnings before interest and taxes in the fourth quarter. ThyssenKrupp AG, Germany’s largest steelmaker, reported its first quarterly profit in almost two years and raised its full-year forecasts.

“Germany is arguably in the best position economically right now in the region and further stimulus measures from the ECB could only help at this point,” Ryan Larson, the Chicago-based head of U.S. equity trading at RBC Global Asset Management (U.S.) Inc., said in an interview.

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