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...

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

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.

Last week, Germany's benchmark index, the Dax 30, produced a "death cross": a widely watched technical indicator that often heralds further falls. It occurs when the 50-day moving average of a share or index slips below the 200-day moving average.

It is apparently especially worrying when both averages are declining, as is currently the case. In the last decade there have been four death crosses in the Dax, Matthew Maley of Miller Tabak + Co told the Financial Times, "and they were all followed by significant declines".

The fundamentals aren't looking very encouraging either: Germany's heavyweight industrial and car stocks are considered to be vulnerable to further US protectionism.

Viewpoint

"World markets are taking another step to embrace China. Bloomberg will add the country's [government debt and bonds issued by state-backed banks] to the Bloomberg Barclays Global Aggregate index [to] attract foreign investors and encourage more liberalisation [China's] $9trn domestic bond market is the world's third largest after the United States and Japan but most international investors have little exposure The bond index news landed one day after US president Donald Trump announced new tariffs on Chinese imports... aimed at reducing the US trade deficit with China, which hit $375bn in 2017. But money flows vastly exceed those of goods and services, with daily trading in currencies averaging more than $5trn A move that encourages more financial transactions with China offsets Trump's barriers to traditional trade."

Tom Buerkle, Breakingviews

German blue chips have almost tripled since the bear market bottomed in March 2009, with the Dax index now at a new record peak around 10,000. But the air is getting thinner, as Wirtschaftswoche puts it.

Technical analysts have noted that market momentum has ebbed in recent weeks and stocks have become more vulnerable to pullbacks. Things look worrying from a fundamental perspective too.

Like its major global counterparts, the Dax is less a domestic than a global barometer. Most of the 30 firms in the index are large exporters and around 75% of all the firms' sales are made outside Germany.

While 69% of goods went to European countries last year, emerging markets, especially China, are becoming increasingly important. China is Germany's fifth-biggest export destination and about 15% of earnings are China-related.

That means the DAX would be vulnerable if there was a financialcrisis in China something that many pundits expect.

The Ukraine crisis is another concern. Germany will suffer if the West imposes tighter sanctions on Russia andRussia retaliates. A sanctions spiralcould cause German exports to Russiato slump by 50% by 2015, reckon analysts at DW Bank.

What's more, the German stock market is one of the world's more cyclical markets, and that makes it more vulnerable than most to a bout of global or European risk-aversion.

All this could easily be shrugged offif valuations were cheap but they aren't. The index looks pricey on 18 times2013 earnings. The forward price-to-earnings ratio is 13, but this figureis based on unrealistically highearnings estimates that ignore the unspectacular growth in the world economy.

Investors who have enjoyed some or all of the Dax's roaring bullrun should take some profits.

Germany was the haven trade until quite recently, says Lorne Campbell of Credit Suisse but this summer sentiment shifted. Since early July, the DAX has lost around 30%; the S&P 500 barely half that figure. August's 19% slump in the DAX eclipsed even the decline seen after Lehman's collapse in October 2008.

So what's the problem? It's partly a question of the German economy slowing and the DAX being an especially cyclical, or economically sensitive, index. But the euro crisis, with many investors concerned about the strength of Germany's banks, appears to be a key issue.

The DAX is highly liquid, and so "it has been one of the indices through which investors have most easily been able to express a negative view", says Campbell. Short-selling bans in other countries have also driven nervous investors into the German market, contributing to selling pressure.

The crisis has made the DAX historically cheap in terms of both the 2012 price/earnings (p/e) ratio and the cyclically adjusted p/e. But with Europe's debt crisis nowhere near over, the index looks likely to get even cheaper.