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Germany’s answer to the United States A small group of companies, known as the Magnificent Seven, have defied the dark clouds hanging over the country’s economy and driven a strong rally in the German stock market this year.
Frankfurt’s Dax index, made up of 40 blue-chip companies, has risen 18.7% since the start of the year, outperforming French and British benchmarks and well ahead of the region-wide STOXX Europe 600 index, which has risen 4.8%.
This achievement was achieved despite the country’s economic downturn and political turmoil. Germany’s unpopular coalition government collapsed in November after the parties failed to reach an agreement on fiscal “debt brake” reforms, and the country now faces snap elections in 2019. February.
Meanwhile, according to a survey of economists conducted by Consensus Economics, the economic growth rate in 2025 is expected to be just 0.6%, a downward revision from the mid-year forecast of 1.2%. This is the largest reduction in projected growth over the period for a major industrial economy.
Timothy Lewis, portfolio manager at JPMorgan Asset Management, said the Dax’s performance was “a surprise” and “a perfect example of the adage that stock markets and economic performance are not the same thing.”
Less than a quarter of the Dax constituents’ income comes from Germany, which has been affected by major shocks such as car giant Volkswagen’s plan to lay off tens of thousands of workers and close several factories. It acts as a buffer against
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This year’s strong stock market returns have been driven primarily by seven companies: software giant SAP, defense stock Rheinmetall, industrial conglomerate Siemens, Siemens Energy, Deutsche Telekom, and insurers Allianz and Munich Re.
SAP alone accounts for nearly 40% of Dax’s profits, and its shares have risen more than 70% as enterprise customers migrate to the cloud. It accounts for a larger share of the index than the auto sector, which includes Volkswagen and Mercedes-Benz, which lost money this year.
SAP has benefited from strong market demand for artificial intelligence stocks this year. Therefore, in order to increase exposure to North American investors and analysts, the company changed its earnings announcement time from mid-morning in Europe to after the US market closes. In October, it replaced Dutch semiconductor equipment maker ASML as Europe’s largest technology company.
Siemens Energy rises 329% on rising demand for renewable power © Justin Tallis/Pool/AFP via Getty Images
Mark Halperin, co-head of European equities at asset management firm Edmond de Rothschild, said: “Tech stocks are the hot topic this year, but unfortunately there are only two major players in Europe: ASML and SAP.” . “AI decorates the cake.”
The seven companies driving Dax’s rise benefit from a variety of tailwinds, with defense firm Rheinmetall up 107% this year on rising expectations for increased defense spending in Europe, and Siemens Energy up 329% this year. % rose. Meet the growing demand for renewable electricity.
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Goldman Sachs macro strategist Guillaume Jason says the market is telling “two different stories,” with market leaders (which he likens to Wall Street’s seven great tech stocks) struggling He said Chinese consumers are leading a large number of vulnerable exporters. and the possibility of U.S. tariffs.
The weaker euro has also boosted Germany’s main export market, with the dollar rising from 1.11 euros to 1.04 euros since the end of September.
Some investors and analysts are concerned about the benchmark’s increasing reliance on a small number of stocks.
Frankfurt Stock Exchange. The narrowness of the Ducks Rally has become even more serious in recent years © Daniel Roland/AFP via Getty Images
“There is a risk of market instability,” said Arne Lautenberg, portfolio manager at Union Investments, who believes the market is vulnerable to an earnings shock from SAP.
He said the market could “change rapidly” with a new administration and possible changes to Germany’s debt brake, U.S. President-elect Donald Trump’s trade tariff plans, or China’s domestic economic stimulus measures. He added that there is.
Halperin added that the company recently moved to a smaller position than SAP’s benchmark as revenue expectations began to rise to higher levels than its U.S. peers.
The narrowness of the Ducks Rally has become even more acute in recent years, a trend that has taken hold in the wake of the pandemic and has left the U.S. with concerns about the role of a few big tech companies in leveraging AI to generate revenue. It reflects. request.
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Chipmaker Nvidia, for example, has accounted for nearly a quarter of the benchmark S&P 500’s gains this year.
However, many fund managers remain bullish on the outlook for German stocks, which trade at a significant discount to U.S. stocks and derive a significant portion of their profits from outside the domestic market.
Mark Schertz, a portfolio manager at Janus Henderson, said the concentration in the Dax is “pretty extreme,” but it’s spread across energy, communications and insurance, unlike in the U.S., where it’s only concentrated in technology stocks. “It’s not a bad thing to have more diverse companies leading the market,” he said.
“The businesses we invest in are all pan-European. It is just a coincidence that they are listed in a particular postal code,” Schatz added.
Additional reporting by Ray Douglas in London
