Investors Turn Backs on German DAX Just in Time for Bull Run

  • Good earnings, optimism about China helped improve sentiment
  • Analysts still forecast equity gauge will drop 6.1% this year

Volume has cratered, earnings estimates are down and forecasters are bearish on German stocks. And yet the benchmark DAX Index just rallied into a bull market.

The 30-stock gauge just completed a 22 percent advance from its February low through Tuesday -- the first major euro-area benchmark to enter a bull market. Improving oil prices, encouraging growth signs from China and better-than-forecast earnings from heavyweights including Munich Re, Volkswagen AG and Siemens AG helped restore more than $210 billion to German stocks in six months. The gauge slipped 0.4 percent on Wednesday.

For investors who missed out, the question becomes whether the gains are sustainable even after economists cut growth forecasts and analysts lowered profit estimates.

“Technically, we’ve entered a bull market, but I don’t think a lot of people are bullish yet,” said Guillermo Hernandez Sampere, the head of trading at MPPM EK. “We are, because we are fully invested, but I think we shouldn’t underestimate the skepticism,” he said. “It would take a lot more still for people to come back into German equities.”

The DAX, rich in exporters including luxury-vehicle manufacturer Daimler AG, chemical producer BASF SE and engineering giant Siemens, has rallied almost twice as much as the Stoxx Europe 600 Index since a low in 2011, and beat peers last year as the European Central Bank’s bond-buying program helped weaken the euro. But in 2016, the rebound in the currency and slowing global demand hit German companies particularly hard, with the index briefly becoming one of the world’s largest losers amid concern over economic growth in China, it’s fourth-biggest trade partner, before shares rebounded.

Although worries about China have since eased, other concerns continue to weigh on German equities: domestic growth faltered in the second quarter after a strong start to the year, while investor confidence fell last month to its lowest level since 2012, following the U.K.’s June 23 vote to leave the European Union. Economists have cut their forecasts for expansion in 2016 to 1.5 percent from their June estimates of 1.7 percent.

Since the February low, the DAX has been boosted by strong performances from some of its largest components. ThyssenKrupp AG has surged 69 percent amid a recovery in commodity prices and merger speculation. Adidas AG has jumped 67 percent after increasing its full-year forecast four times this year. Volkswagen AG has regained 35 percent and BMW AG has recouped 20 percent since February.

But during this rebound that took the DAX to its highest level of the year, only about 96 million shares changed hands every day on average since Feb. 11, compared with 117 million during the selloff that took it down as much as 19 percent. As of yesterday’s close, the gauge was still 14 percent below its record last April.

Some investors remain unconvinced that the progress is sustainable, and last week withdrew the most money since April from the biggest exchange-traded fund tracking German stocks. Analysts have cut their profit-growth estimates for DAX companies by 4.6 percent since December. Against this backdrop, the DAX’s dividend yield of almost 2.9 is the primary reason for its gains, according to Daniel Weston.

“Dividend yield is the be-all and end-all as to why we have entered this bull market,” said the chief investment officer of Aimed Capital in Munich. “It is not German growth that is supporting this bull market. That is a risky proposition for stock investors who remain bullish.”

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