Despite disappointing GDP data, Germany’s DAX index, which measures 40 German blue-chip stocks, hit a record high on Monday, and this is not the first time the German stock market and economy have diverged sharply. FactSet data shows that Europe’s largest economy shrank for the second consecutive year in 2024, but the DAX index saw price increases of 20.31% in 2023 and 18.85% last year. That’s why. .GDAXI 5Y Line DAX index does not reflect German GDP well. First, the sectoral size of the German economy is very different from the industry weighting of the DAX index. For example, manufacturing, software and technology together account for more than 50% of the stock market but a much smaller share of the economy, according to a Jan. 20 Deutsche Bank report. Furthermore, while public sector activity is reflected in the economy, it is completely absent from the stock market. The composition of the DAX index has also changed much faster than the economy over the past decade. About 10 years ago, automakers dominated the stock market with a 17% share. Today, they account for just 7%, according to Deutsche Bank. The opposite is true for the technology sector, whose weight grew from 8% to 18% during the same period. Key stocks driving the market higher The companies listed on the stock market also differ significantly from how the economy is calculated. “One of the reasons for the divergence between weak German economic growth and the strong performance of the DAX is the strong export exposure of DAX companies,” said Deutsche Bank strategists. According to the investment bank, 80% of DAX companies’ funds are in Germany Earn overseas. In fact, German companies sell a greater proportion of their total sales to the United States (24%) than to Germany (20%). However, Germany’s economy is calculated primarily on domestic demand. Just a handful of companies have powered the German stock market over the past two years, mimicking the Magnificent 7 index’s impact on the S&P 500. For example, software giant SAP alone will contribute 7.8% to the performance of the DAX index in 2024, according to Deutsche Bank. SAP, Deutsche Telekom, Allianz, Siemens AG, Siemens Energy, Munich Re and Rheinmetall accounted for 98% of the total DAX return last year. Without them, the index would have risen only 5% by 2023 compared to actual results. Germany’s economic downturn While the DAX index continues to rise, the German economy has continued to be sluggish for a period of time, with GDP declining continuously in 2023 and 2024. in 2024, but avoided a technical recession. Preliminary preliminary data from Destatis last week on Germany’s GDP in the fourth quarter of 2024 showed a 0.1% decline, which Deutsche Bank chief German economist Robin Winkler said at the time was cause for concern and evidence. It shows that the economy cannot maintain its growth momentum again. The Bundesbank expects calendar-adjusted real GDP to grow by 0.2% in 2025, while the International Monetary Fund’s latest forecast is 0.3%. That puts it well behind other major European economies such as the United Kingdom and France, which the IMF said are expected to grow by 1.6% and 0.8% respectively by 2025. The fund expects the euro zone to expand by 1% this year. Several issues are weighing on the economy, from a long-running crisis in the homebuilding industry (due to rising interest rates and construction costs) to a downturn in key industries like automotive, which is linked to the shift to electric and electric vehicles. Contest. “The hope is that the new government after February’s federal election will take steps to stimulate the economy, especially the struggling industrial sector, although this assumes that an effective bipartisan coalition can be assembled and acted upon, rather than, as ADM Investor Services chief economist and Global strategist Marc Ostwald said: “A traffic light alliance is not impossible… but it could be very challenging. “In terms of relative value, the DAX has a P/E of 15.7 compared to the S&P 500’s P/E of 25.2, so it looks relatively cheap, and while many would consider it cheap for a reason, I Would say it’s a pretty good value considering the above issues,” Ostwald said. Stock market performance is as bad as economy The German stock market as a whole is not prosperous. Mid-cap and small-cap stocks appear to reflect GDP performance better than large-cap stocks. FactSet data shows the MDAX index is down 5.71% annually in 2024, while the SDAX fell 1.78% last year. “The reasons for this and increased risk aversion (in small- and mid-cap stocks) are Trump’s election victory, sluggish public spending, political uncertainty following the collapse of the German government coalition, lack of overseas momentum and the deterioration of the German economy, especially In the automotive industry and construction industry,” Metzler equity analyst Stephan Bauer said in a January 20 report. Still, Ball said smaller stocks could rebound in 2025.
Why Germany’s DAX stock index is booming but economy shrinks for second straight year | Real Time Headlines
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