Love Affair With German Stocks Rekindled as DAX Erases Drop

Updated on
  • DAX is first major euro-area gauge to turn positive for year
  • BofA survey shows fund managers are overweight German stocks

Germany’s DAX Index has once again defied the skeptics, becoming the first major euro-area equity gauge to recoup its losses for the year.

Investors are turning to German stocks in the calmest market rally of the last 18 months, as a weaker euro and expectations for more European Central Bank stimulus boost exporters. Exchange-traded funds tracking the nation’s shares gathered the most money after the U.S. and Japan in the past week.

The DAX extended a rally after entering a bull market last month, becoming one of the year’s top performers among developed markets. Even as strategists forecast a 7 percent slide for the DAX this year, European fund managers are the most overweight German stocks since February 2015, a Bank of America Corp. survey found, while private investors are the most bullish on the benchmark index since at least July.

“A lot of the concerns investors had in the first quarter didn’t materialize, so now we see some catching up,” said Christian Gattiker, the head of research at Julius Baer Group Ltd. in Zurich. His firm manages 284 billion Swiss francs ($293 billion). “The market is telling you right now that things are more or less back to normal. The weaker euro has been driving earnings for German companies and it will continue to be a tailwind.”

German stocks tumbled as much as 19 percent early this year, in one of the world’s biggest equity slumps, as fears of a slowdown in China triggered a worldwide selloff. 

Now, with global growth projected to accelerate to 3.2 percent next year and concerns receding, a weak euro is boosting export-dependent firms including steelmaker ThyssenKrupp AG, chemical company Linde AG and HeidelbergCement AG, which have rallied more than 26 percent since the June low that followed the U.K. secession vote. Helping restore confidence, the Bundesbank said last month that the British referendum result will have limited impact on the domestic economy.

The DAX added 0.1 percent at 10:02 a.m. in Frankfurt, up for a third day for the first time in a month.

While profits at German companies are estimated to contract this year, the expected drop of 1.9 percent is half that forecast for Stoxx Europe 600 Index members. DAX stocks are also cheaper than their European peers, trading at about 12.9 times estimated earnings, near a record low relative to Stoxx 600 firms. About 53 percent of fund managers were overweight German equities, according to a Bank of America report in August, compared with about 20 percent in January.

Still, recent data ranging from industrial output to private-sector activity have missed forecasts, and, according to Michael Kapler, a fund manager at Mittelbrandenburgische Sparkasse, investors lured by central-bank stimulus should note that earnings and economic growth may stagnate, weighing on the DAX. Also, the rebound has come amid a trough in trading volume and the quietest market since March 2015.

“There is a kind of squeeze for investors to go into equities to look for returns,” said Kapler from Potsdam, Germany. “Investors are very complacent and simply lack other opportunities. At the end of the day, you need economic growth and you need earnings growth. It won’t be enough over time to have only this stimulus.”

But with some German bond yields below zero, investors are finding it harder to generate returns. In the stock market, the estimated dividend yield for DAX companies is 3.1 percent, near a record high versus the rate on 10-year debt.

“In a world where interest rates are very low, you don’t need too much earnings growth because even a bit of growth will attract money,” said Philippe Gijsels, chief strategy officer at BNP Paribas Fortis in Brussels. “If you want to go into the European market, Germany is the place to be.”

(Updates with Thursday trading in seventh paragraph.)
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