Photographer: Ralph Orlowski/Bloomberg

Strategists Turn Bearish on One of Europe's Most-Loved Markets

  • They estimate the DAX Index will end the year at 10,569
  • Biggest ETF tracking German shares has had outflows this year

As recently as last year, German stocks were among investors’ favorite in Europe. Now, even strategists, who started the year with bullish calls, have turned bearish.

The benchmark DAX Index will fall 1.6 percent this year, according to the average of 13 projections compiled by Bloomberg. That would mark the first annual decline since 2011 for the gauge, which rallied almost twice as much as its regional peers since a low that year.

Strategists have slashed their year-end forecasts across the region amid rising pessimism about earnings. Previously favored because exports made them resilient to Europe’s struggling economy, DAX companies have been punished by the slowdown in global demand and strengthening euro. Although the index has rebounded faster than the Stoxx 600 from its February low, worries are intensifying that a worsening outlook for growth will put a break on a rally that has restored more than $200 billion to German equities in two months.

“Even if it hasn’t felt that way lately, it will stay pretty rough,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf, Germany. He predicts a 0.5 percent annual gain in the German index. “The DAX is mainly driven by global events, and its stocks are heavily exposed to the global business cycle -- the conditions for a boost to growth are not there.”

The DAX has lost 5.8 percent this year, slightly less than the Stoxx Europe 600 Index. At the same time, the cost of options hedging against further swings in German shares has climbed to its highest level since last May, relative to the region. Strategists have cut their average year-end target for the DAX to 10,569 from 11,664 in January. They expect the Stoxx 600 to finish 2016 virtually flat.

With pullbacks in Chinese growth weighing on exports, German investor confidence is now near its lowest level since 2014, even after the European Central Bank increased stimulus in March. The measures failed to suppress a rise in the euro against the dollar as traders’ expectations for the timing of more interest-rate hikes from the Federal Reserve got pushed back. China and the U.S. together are among Germany’s biggest trade partners.

German firms are feeling the pinch. BMW AG, whose shares have lost 20 percent this year, gave a muted outlook for 2016 and reported an increase of just 1.7 percent for deliveries to China, the world’s biggest auto market and the largest buyer of German cars. Daimler AG -- down 19 percent -- predicted truck sales will decline this year amid fading demand in the U.S. and a slowing Brazilian market. Earnings for Bayer AG missed projections after its agricultural unit took a hit from lower commodity prices. Henkel AG, the maker of Schwarzkopf shampoo, said it will struggle to meet its sales target.

Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany, says he’s still optimistic. The stocks are cheap, with the valuation for the DAX at 12.3 times estimated earnings, near the biggest discount versus the Stoxx 600 since Bloomberg began compiling the data in 2005.

“Compared to other indices, the DAX still has power,” Hernandez Sampere said. “Its companies have learned well from crises in the past. The market sentiment might be worse than the situation.”

Still, many prefer to remain cautious. An exchange-traded fund tracking German shares saw almost $630 million in withdrawals since February.

“The DAX needs business confidence to pick up,” said Kevin Lilley, a fund manager at Old Mutual Global Investors in London. “We could do with a few more positive influences to come through to get people investing and consuming again.”

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