“The Dax is such a sensitive index… it gets whipsawed by perceptions of Chinese growth,” says Rupert Welchman of Union Bancaire Privée. Germany’s blue-chip index has suffered a nasty collapse this year. Like other European markets, August was its worst month since 2011 – it fell by more than 9%.
But unlike its major counterparts, it lost more than 20% from its April peak amid the panic over China, fulfilling the definition of a bear market.
The index is prone to big swings because it is among the world’s most cyclical markets – most of the companies in the index are in industries sensitive to the economic cycle. It’s hardly the only market whose companies make most of their sales abroad (around 75% in its case). But it is unusually skewed to China.
Goldman Sachs estimates that China accounts for just over 10% of Dax firms’ sales, compared to 6.4% for the FTSE 100 and a eurozone stockmarket average of 5.8%. Carmakers have looked especially exposed: Daimler sells 20% of its cars in China, and it is VW’s biggest market.
But is the gloom overdone? For one thing, China has unleashed more stimulus, suggesting that the data should soon improve, and China offers plenty of long-term potential in the form of growing consumption over time. And while other major emerging markets, such as Brazil and Russia, have run out of steam, the global economy continues to grow, led by a firmer American economy.
More to the point, the weak euro is crucial. A study by EY found that around two-thirds of the jump in Dax companies’ second-quarter turnover to record levels was due to the weak euro. With the European Central Bank ready to prolong or increase its quantitative easing programme to support the European recovery, weakness in the euro seems unlikely to reverse any time soon.
Printed money always ends up in asset markets. It’s also worth noting that the yuan is still up by 10% against the euro this year, so there has been little damage to German exports’ competitiveness in China following the devaluation.
What’s more, the German market’s 2015 price/earnings ratio is now 12.7, lower than that of its major counterparts. In short, the German market could be worth a look. The db-x Trackers DAX UCITS ETF (LSE: XDDX) tracks the Dax, while Wirtschaftswoche suggests buying shares in established blue chips with impressive long-term records, such as chemicals giant BASF (Xetra: BAS), which yields 4%.