Tailwind for German stocks
Feb 17, 2012
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The bulls are out in force in Germany. The benchmark DAX index has gained almost 14% in 2012 – the best start to a year since it was created 24 years ago, says FAZ.net. In euro terms, it’s the best-performing index this year.
There has been an abrupt turnaround in sentiment, says FAZ.net. The European Central Bank’s decision to lend banks almost €500bn for three years at just 1% has eased the eurozone debt crisis and made a banking crisis far less likely.
What’s more, the latest German data has been positive. The Ifo Institute’s business confidence indicator, which tends to presage stockmarket movements, has ticked up. Earnings have been solid. Indeed, analysts have stopped lowering their 2012 earnings forecasts in recent weeks; they now reckon the 30 DAX firms can increase profits by 4%. The DAX also looks reasonably valued on a price-to-earnings ratio of ten.
Yet the bigger picture is discouraging. The DAX reflects Germany’s reliance on exports, which comprise 50% of GDP: 70% of DAX sales are made abroad. Exports slumped by 4.3% in December, their worst month since early 2009. The shrinking European economy is the main reason, as the eurozone still accounts for over 40% of exports.
Emerging markets, where growth has also slowed, account for 28%, with China alone making up 6% of exports. German industrial output also tanked in December, and households are likely to remain cautious amid the ongoing euro crisis, says Capital Economics. So domestic demand seems unlikely to compensate for slowing exports. The German economy shrank in the last quarter of 2011 and looks set to stagnate this year.
As for the euro crisis, the threat of an uncontrolled Greek default remains, and the European Central Bank’s three-year lending programme has merely papered over southern Europe’s problems, adds Joerg Kraemer of Commerzbank. The key reason the DAX, and other markets, have surged is the liquidity sloshing around the global system.
“There has seldom been such a monetary tailwind” for equities, says Commerzbank’s Andreas Huerkamp. As one of the more cyclical major markets, the DAX tends to get a sharp boost when risk appetite is high. The flipside is sharp declines when investors’ mood sours and money rushes out of the market.
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