Germany continues to prove a paradox for investors with the economic and political data proving to completely different to the stock market performance. The DAX index is the best performing top level country index in Europe this year, up 15.2%, while its neighbour France is the worst performing, down 4.6%. The likelihood of Scholtz facing an election, which he is predicted to lose next year, has fed through to the bond markets, however, seems to be trumped by Le Pen causing headaches for Barnier, the OAT-Bund 10-year spread had ballooned to record levels in recent weeks.
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Richard Scrope
Fund Manager
When the macro and the markets diverge.
The economic data out of Germany has been dismal for the past three years, and the recent IFO data came in with a reading, of the current situation, being as bad as it was at the height of the GFC and the pandemic.
This raises the question as to why the DAX is defying this economic data, and performing well, especially given the flurry of news of Volkswagen and the other automotive companies cutting jobs and closing factories. This anomaly is compounded by China, so long the source of growth for Germany’s exports ($106bn in 2023), failing to show signs of life despite all the recent stimulus provided by the PBOC.
The performance of the underlying companies of the DAX has not been uniformly impressive, which is not surprising given the state of the automotive sector. Below we break the index down by revenue exposure to domestic Germany, however, there seems to be a direct relationship between the two, as the out and underperformers are spread throughout the table.
Given that over 43% of the underlying companies of the DAX have negative YTD returns, we also dissected the DAX by weighting to interrogate whether it is distorted by one or two stocks with outsized weightings, a problem that has been prevalent in the US markets in recent years.
Given that just over 40%, by weighting, of the DAX members have negative returns YTD, suggests that the weightings in the index do have a significant part to play in the divergence between the macroeconomic data and the DAX returns. SAP has the largest weight in the index, and had in size to be reduced after breaching the DAX’s 15% limit, and is the third best performer in the index, but also the performance of Siemens Energy should be highlighted.
All this would confirm to us the importance of stock picking and active management, as buying ETFs covering country or regions can be skewed one way or other by one or two stocks, and one needs to know what exactly you are investing in and why.
Interestingly the MDAX index has not performed nearly as well as the DAX, tallying much more with what the macroeconomic data might suggest.
The MDAX index of the 50 largest companies by market cap that rank outside the DAX index has fallen in real terms over the year so far and has underperformed the DAX by 18.4%. Perhaps all is not as well in the German stock markets as one might conclude if you just looked at the headlines.
It is worth remembering that stock markets are forward looking beasts and can often differ from the current macroeconomic data even if they do not seem to in this case. As the late Charlie Munger once said “There are 60,000 economists in the US, trying to forecast recessions & interest rates & if they could do it successfully, they'd all be millionaires by now. As far as I know, most are still gainfully employed, which ought to tell us something”
Data source (unless otherwise stated): Bloomberg
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