Will the DAX dive further in 2019?

Brandenburg Gate, Germany © iStock
The German economy shrank in the third quarter of 2018

Germany’s benchmark index, the DAX-30, was far from the only stockmarket to suffer its worst year in a decade in 2018. But its 18% decline was worse than that of most other major markets; the FTSE 100 lost some 12.5% last year. One problem is a downturn in Germany.

GDP grew by only 1.5% last year, its slowest rate in five years. The economy shrank in the third quarter, and the latest surveys suggest it barely managed to expand in the fourth. Industrial production showed a 1.9% fall in November, rather than the predicted 0.3% rise. Year-on-year this amounts to a 4.6% drop, the worst performance since the financial crisis.

A geared play on global growth…

The key to the DAX’s performance, however, is the world outlook. The DAX is more cyclical than most other major indices and one of the most globally-orientated. More than 80% of the Dax constituents’ sales are made beyond Germany’s borders. This makes the index a highly geared play on global growth. In this context, the outlook is inauspicious.

Out of all the major global economies, Germany is the most reliant on trade and “signs that the world economic cycle is past its peak has led to an outbreak of pessimism among the country’s manufacturers,” says Claire Jones in the Financial Times.

China is slowing down and global trade is cooling. This has hit Germany in particular because exports make up 47% of its GDP, and many of those exports go to China. Both Daimler and BMW have issued profit warnings, blaming the prospect of new tariffs and new emissions tests for weakening demand, says Spriha Srivastava on CNBC. According to Bernstein, German carmakers made 40% of their profits in China last year.

… implies a potential bounce

Meanwhile, the eurozone as a whole is slowing too while the sugar rush from the Trump administration’s tax cuts has worn off, says David Smith in The Times.

No wonder the latest Bank of America Merrill Lynch survey of global fund managers showed 60% expect weaker global growth this year – the highest proportion since 2008.

Still, as The Economist notes, there is a more optimistic scenario. The discussions between the US and China could disperse the “trade war clouds”. Furthermore, “tax cuts and looser monetary policy in China could stimulate spending in the private sector”. This would bolster other Asian economies, and increase demand for European exports once again, which would “buck up activity in the eurozone”.

What’s more, European stocks are “cheap”, following the latest market slide, according to Jens Ehrhardt of DJE Kapital in Wirtschaftswoche, while Austria Boersenbrief points out the DAX companies remain on track to pay out a record sum in dividends in 2019. So the index could mount a strong recovery. There is a chance that in stark contrast to last year, it could be one of the year’s best-performing stockmarkets in 2019.

disfi.com