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Trouble Comes in Threes for Germany’s DAX Losing European Crown

Updated on

The woes keep piling up for German stocks.

The benchmark DAX Index, which as recently as June was outpacing the Stoxx Europe 600 Index by the most in three decades, has since turned into one of the biggest laggards among global peers. Investors are also betting on more volatility, with the cost of options trading in the gauge rising to the highest in 15 months relative to those on European stocks.

What’s hurting the German index now is the same quality that helped it outperform in the region in the past 14 years -- a heavy weighting of exporters and industrial companies. First, a soaring euro stoked worries that overseas profit will be hit, followed by carmakers facing allegations of collusion over emissions-cheating technology. Now, data for July suggest that even on the domestic front, economic growth in Germany is falling behind.

“Germany has had its moment,” said Michael Woischneck, senior equities manager at Lampe Asset Management in Dusseldorf, Germany. “Investors don’t really like the companies that most define the DAX. You can definitely find better economic and earnings growth elsewhere now.”

While the DAX was up as much as 12 percent for the year as recently as June, it has since erased half the gains. It trades near the biggest discount in 10 months relative to the Stoxx 600, on an estimated earnings basis. Analysts predict German firms will increase their profits by 8.8 percent on average this year, less than the 13 percent boost projected for Europe.

Data on Thursday showed growth in Germany’s services and manufacturing industries slowed in July, lagging Spain, Italy and France for the time in more than 12 years. Another report on Friday showed factory orders in the previous month beat estimates. While sentiment toward German stocks remains positive for now, some European fund managers last month switched their preference for equities in France and Spain, according to a Bank of America Corp. survey.

Options traders have also grown more cautious on Germany, with two-month contracts protecting against DAX swings near the most expensive since April 2016 compared with those on the Euro Stoxx 50 Index. The DAX is down 5.7 percent since its June record, closing at 12,154.72 on Thursday. French and Spanish measures have each lost only about 3 percent.

“I’d expect the next few months to be very volatile,” Lampe’s Woischneck said. “It’s all about finding the best entry points and being very tactical. We’d start buying if the DAX drops to around the 11,800-11,900 level.”

(Updates with Friday’s data in sixth paragraph.)
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