Dax: The uncanny strength of the German stock market
At 15,800 points, the Dax is only three percent below its all-time high, which it marked on January 5, 2022 at 16,272 points. This is a remarkable stability of the German stock market in view of the numerous serious threats that the global stock exchanges are currently having to live with:
- The inflation Although it has regressed from double-digit regions, it is now fairly persistent in the mid-range between five and seven percent price increases. New price hikes for raw materials and consequences such as sharp wage increases are unlikely to make it possible to return to the inflation rates from before the great wave of inflation in the medium term. The target of two percent is likely to remain a desirable target for the foreseeable future.
- The rate hikes of the central banks, which both the American Fed and the ECB have now pulled through, represent the strongest tightening of monetary policy in many decades Monetary authorities take liquidity out of the market. Even if the decisiveness of the central banks is welcomed, more and more side effects are now appearing.
- One banking crisis started as a direct result of massive rate hikes; especially in the case of smaller and increasingly medium-sized financial institutions in America, which are particularly vulnerable to rapid increases in interest rates due to their specialization or business policy. The problem for the markets and the economy is not so much the fact that some institutes are going under or have to be rescued. The real danger lies in the general crisis of confidence, which even the big financial players are feeling: In America, it’s not just the stocks of regional banks that are trending down; the stocks of the industry giants from Goldman Sachs to JP Morgan are also subdued. In the Dax, the listings of Deutsche Bank and Commerzbank are under pressure, although their operational development does not look like a banking crisis at all.
- The risk of recession increases again. In the meantime it looked as if the severe economic downturn feared last year would not materialize at all, but the prospects are now darkening again: the former economic engines America and China are losing steam. In Germany, incoming orders in industry fell as sharply in March as they did last time during the corona crisis. Higher interest rates are leaving deep scars on the real estate markets, making loans expensive and inhibiting the granting of new loans. Losses in the value of bonds and real estate, as well as high price increases for everyday items and goods, are increasingly slowing down consumption, which is essential for economic development, especially in America.
- The geopolitical crises, above all the war in Ukraine and the tensions between western industrialized countries and China, have led to a period of familiarization on the stock exchanges after more than a year. At present, however, there is little prospect of a substantial solution. What’s more: an escalation, for example about the island of Taiwan or the use of nuclear weapons in Europe, is by no means off the table. And economically, after the first price shocks for raw materials and delivery difficulties, new problems are now arising: World trade, especially to and from Asia, is collapsing. Large logistics companies such as the Danish MöllerMaersk or the Deutsche Post in the Dax, important early indicators of the economy, are feeling the effects of this very closely. Technology companies like Infineon, which were previously dependent on Asian markets (both on the customer side and on the supplier side), are gradually switching to Europe. The car and chemical companies in the Dax, all of which are massively relying on China, are neither willing nor able to make such a fundamental change of direction in the foreseeable future. And sports goods manufacturer Adidas, for example, which is currently fighting for its comeback after the crash of the past few years and had to cope with a massive decline in its margin in the first quarter with stable sales, also wants to significantly expand its China business with new product lines and new production facilities.
Also read: The developments of the Dax up-to-date
Many success stories support the Dax
The fact that the Dax is almost at an all-time high despite these serious problems is a sign of the stock market’s inner strength. “Inner strength” means here that the individual values of the Dax, i.e. ultimately the companies, have definitely found a way to live with these problems according to the assessment of the market. But are the individual values in the Dax really that strong and do they justify a price increase of more than 30 percent since October alone?
The Dax is currently benefiting from the fact that individual stocks such as Deutsche Telekom, Allianz, Munich Re, Beiersdorf, Deutsche Börse AG, Rheinmetall and even Siemens are close to their respective highs or are even breaking new ground (this is unusual for Telekom and Allianz strong development at the turn of the millennium excluded).
Insurance companies are fueled by the growing need for protection in an increasingly uncertain world – especially at a time when other financial stocks such as banks are struggling. Telekom and Rheinmetall are typical crisis winners with their businesses – one defensive and one offensive. After several attempts, Siemens is now increasingly successful in developing from a traditional electronics company to a digital high-tech company. Beiersdorf is a success story about the transformation of a classic brand likelevand into the modern age. And Deutsche Börse has developed an ingeniously stable business model that is always on the winning side, regardless of whether stocks, bonds, interest rates or electricity prices are rising or falling.
In addition, several leading stocks are catching up: At SAP, the development towards the cloud business is finally being recognized on the stock exchanges. With its success story in semiconductors for e-mobility and new energies, Infineon catches up with the internationally high valuation of chip stocks. E.On and RWE, both driven by the secular appreciation of electricity as an energy source, are continuing their multi-year recovery after the initial disaster of the energy transition.
Even the car stocks BMW and Mercedes-Benz are on a good course. The development of the operational business in the first quarter is stable for both. And the dedicated China risk of both companies, which are even linked to China through investments, should be largely processed by the unusually low analytical valuation of the shares (with regard to sales, profit and equity).
Conclusion for the Dax: The most recent rate hikes by the central banks were as expected. Both the American Fed and the ECB are likely to leave it at this level for the time being in view of partial progress in fighting inflation, virulent banking problems and the increasing risk of recession. In addition, the reduction in central bank balance sheets is sucking up a lot of liquidity anyway – and this is now also happening in Europe.
After a pause in interest rate hikes, it is probably too early to go straight back to lowering yields. At the Fed, which sets the pace, plateau phases in monetary policy have lasted many months in each of the past decades. Of course, it cannot be ruled out that the central banks will, if necessary, shift the lever to expansion more quickly if the banking problems worsen and there is a real risk of a new financial crisis. But that’s not the likely scenario for the next few months.
After six weeks of rising prices, from mid-March to the end of April, the Dax should now have started the expected correction. The next supports are in the 15,600 to 15,200 point range, then in the 15,000 to 14,700 point zone. The 200-day moving average, which currently stands at 14,229 and is trending higher, should reach the 14,500 area by June; there has also been a series of medium-term highs at this level since January 2022, which may prove to be possible supports in the coming weeks and months.
All in all, the Dax has the chance of a moderate correction in the next few weeks, which – after a classic six-week cycle – could possibly be followed by a new phase of growth in June.
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