Germany’s DAX index has jumped by almost 25% this year, compared to FTSE 100’s 4% rise. The long-term outlook remains encouraging, as the cyclically-adjusted price-to-earnings (p/e) ratio, or Shiller p/e, is below average, says GeVestor.de. But the near future is likely to be bumpy.
The DAX is especially prone to sharp moves up and down because it is a geared play on global, rather than on German growth alone. The 30 members of the index make around 75% of their sales abroad. Moreover, a greater proportion of these firms are in cyclical sectors than in most European markets.
So the positive sentiment surrounding further central bank money printing (quantitative easing, or QE) has boosted the DAX, but “with the focus quickly returning” to the economic weakness that “made the stimulus necessary in the first place”, as Capital Economics puts it, the rally looks set to peter out.
The eurozone still accounts for the lion’s share of German exports and the downturn there is gathering pace. Last year, says Wirtschaftswoche, exports to BRIC states exceeded those to the European periphery. But with emerging markets weakening, demand there is set to slide.
The slowdown bodes ill for the export-dependent German economy. Sentiment among consumers is already shaky, which makes a recovery in domestic spending “very unlikely”, say Capital Economics. Germany is heading for recession. With the earnings outlook clouding over and the buzz from QE fading, the DAX is now likely to run out of puff.