Time to Buy DAX Equities After 11% Correction, JPMorgan Says

The litany of woes that sent the German stock market into a correction may have finally made them cheap enough for investors.

Even after surging 3.8 percent on Monday, the DAX Index trades at 14.4 times estimated earnings of its members, a seven-month low relative to the broader European market. At this level, JPMorgan Chase & Co. says it’s time to start purchasing the nation’s equities again. The bank predicts a 13 percent jump to 13,000 through the end of the year.

German stocks rallied the most since 2012 on Monday as optimism grew that the Greek impasse was coming closer to a resolution. After being among the biggest decliners in western Europe this quarter, investors are speculating German shares now have the potential to rally more than others as an improving economy leads to earnings growth.

“That’s a brilliant environment for German companies, and a brilliant opportunity for investors,” said Michael Kapler, an equity manager at Mittelbrandenburgische Sparkasse in Potsdam, Germany. “The index is cheap, European growth is picking up and earnings are improving. We’ll have the tailwinds from the low euro and oil come through more evidently in the next quarters. The DAX can see new highs.”

German stocks more than tripled from 2009 through a peak in April, before being among those hit the hardest in the European stock selloff. A rebound in the euro, rout in bunds and the Greek impasse all contributed to the DAX falling as much as 11 percent. Equity strategists at Bankhaus Lampe KG and UniCredit Bank AG forecast earlier this month that the index may slip to 10,000 should Greece exit the euro.

Easing Concern

Now concern over the Greek deadlock is easing, and investors are returning to German shares. With the nation’s economy forecast to expand faster than the euro area’s this year, analysts have increased their projections for earnings growth at DAX companies by 2.3 percent since the beginning of 2015. Whatever happens to Greece, the repercussions on German companies should be little as the country isn’t among its top 15 trading partners.

The DAX rose 0.7 percent at 9:25 a.m. in Frankfurt.

Coutts & Co.’s Norman Villamin said his firm took profits from German shares in April to invest in Europe’s periphery, such as Spain and Italy.

“The European recovery will be domestic, and there is no incremental driver for Germany,” said Villamin, Coutts’s chief investment officer in Zurich. “German stocks would become attractive again if there were a boom for one of its export markets or one for domestic spending. But German consumers are not American consumers. They are not levering up.”

ETF Inflows

Still, an exchange-traded fund tracking German shares is heading for a second month of inflows after traders withdrew the most in three years in April. It received more than $200 million in June through the end of last week.

Options traders have also grown more bullish on Germany. Contracts protecting against DAX swings are near the cheapest since March compared with those on the Euro Stoxx 50 Index. Their relative cost reached the highest level since 2007 later that month, before the DAX last peaked.

“It should not be all about Greece,” Mislav Matejka, an equity strategist at JPMorgan in London, wrote in a note. “Private sector has almost no direct exposure to Greece any more. From here, we don’t see further appreciation in euro, nor in oil, which should help DAX.”

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