A handful of corporations dubbed Germany’s answer to America’s “Magnificent Seven” are making a strong rally in the country’s stock market this year, defying the pessimism enveloping the national economy.
The Frankfurt Dax, an index of 40 star stocks, has risen 18. 7% this year, outperforming benchmarks in France and the United Kingdom, and outpacing the 4. 8% gain of the regional Stoxx Europe 600 index.
The effects come despite weak domestic expansion and political turmoil, with Germany’s unpopular coalition government collapsing in November after the parties failed to reach an agreement on fiscal reforms to “curb debt”, and the country now heads to early elections in 2017. February.
At the same time, the economy is expected to grow just 0. 6 in 2025, down from 1. 2 expected mid-year, according to economists surveyed through Consensus Economics. This is the biggest relief in the projected expansion in an era of any primary trading economy.
The Dax’s functionality “came as a surprise,” said Timothy Lewis, portfolio manager at JPMorgan Asset Management, and “it’s a wonderful example of the saying that the stock market and economic functionality are the same thing. “
Dax citizens get less than a quarter of their source of income in Germany, which has helped cushion shocks that, for example, have caused car giant Volkswagen to announce plans to lay off tens of thousands of employees and close several factories.
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This year’s bumper stock market returns have largely been driven by seven companies: software giant SAP, defence stock Rheinmetall, industrial conglomerate Siemens, Siemens Energy, Deutsche Telekom, and insurers Allianz and Munich Re.
SAP alone accounts for nearly 40 per cent of the Dax’s gains, with its shares up more than 70 per cent on the back of its transitioning of business customers to the cloud. It makes up a greater proportion of the index than the auto sector, including Volkswagen and Mercedes-Benz, both of which are in the red this year.
SAP has benefited from the market’s huge appetite this year for stocks with exposure to synthetic intelligence. To this end, it has moved the timing of its earnings release from European mornings to after the US market closes, to give more exposure to North American investors and analysts. In October it replaced Dutch semiconductor device maker ASML as Europe’s largest generation company.
“Tech stocks have been the story this year and unfortunately in Europe we have two main players: ASML and SAP,” said Marc Halperin, co-head of European equities at asset manager Edmond de RothschildArray. “The icing on the cake is AI. “
The seven companies that have powered gains in the Dax have benefited from a variety of tailwinds, with defence company Rheinmetall climbing 107 per cent this year on the back of rising expectations of more defence spending in Europe, while Siemens Energy has gained 329 per cent due to growing demand for renewable power.
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Guillaume Jaisson, a macro strategist at Goldman Sachs, said the market was telling “two other stories,” and that market leaders — which he compared to Wall Street’s seven superb tech stocks — were outperforming some exporters vulnerable to weakness from Chinese clients and imaginable U. S. tariffs.
A weaker euro has also boosted the export-focused German market, which has fallen from 1. 11 euros to 1. 04 euros since the end of September.
Some investors and analysts are concerned about the benchmark’s growing dependence on a small number of stocks.
“This threatens to make the market unstable,” said Arne Rautenberg, a portfolio manager at Union Investment, who believes the market is a surprise for SAP’s earnings.
The election of a new government and potential changes to Germany’s debt brake, US president-elect Donald Trump’s plans for trade tariffs, or China’s stimulus for its domestic economy could “change things very quickly” for the market, he added.
Halperin added that he had recently moved to a position on SAP that was smaller than the benchmark as earnings expectations started to climb to the lofty heights of US peers.
The narrowness of the Dax rally has deepened in recent years, with the trend shown in the wake of the pandemic and mirroring that of the United States, where the role of a few large technology corporations in generating AI returns is feared.
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Chipmaking giant Nvidia for example accounts for nearly a quarter of the benchmark S&P 500’s gains this year.
But many fund managers remain optimistic about clients trading German stocks at deep discounts to their U. S. counterparts and making a significant portion of their profits outside their home market.
Marc Schartz, portfolio manager at Janus Henderson, said that the concentration of the Dax is “quite extreme” but that it extends to energy, telecommunications and insurance, unlike the United States, which only concentrates on generation stocks. “Having a more diverse set of corporations driving markets is not a bad thing,” he said.
“The companies we invest in are all pan-European. It’s just a fluke that they’re indexed in a certain zip code,” Schartz added.
Additional information via Ray Douglas in London