Germany's DAX index breaks records as recession looms

Germany is headed towards a technical recession, but the DAX, its blue-chip stock index, is on a streak of record highs. Confidence in the country’s 40 biggest firms has little to do with sentiment on the ground.

Germany’s biggest stock index has had a week of record performance

The DAX 40 is on a tear. For the sixth day in a row, Germany’s most important stock index, which tracks the performance of the 40 largest and most actively traded companies in Europe’s biggest economy, has hit a record high.

The trend is a rare piece of positive money news out of Germany as of late. Last week, Germany’s economy minister revised the country’s growth expectations for 2024, lowering the forecast from 1.3% to 0.2%.

“The fact that the global economic environment is unstable and global trade growth is historically low is a challenge for an export nation like Germany,” the economy minister, Robert Habeck, said.

The German Bundesbank, the country’s central bank, had also announced that economic output in Germany was set to fall again slightly in the first quarter of 2024, pushing the country into a technical recession , which is defined as two quarters of negative growth. The bank cited widespread strikes as a key contributing factor.

Many companies on Germany’s DAX index have little exposure to the local economy, experts say

DAX has little exposure to Germany

Like elsewhere, Germany has been plagued by high inflation, leaving consumers strapped for cash. Industrial orders and production in the export nation have also fallen, and surveys show German companies increasingly pessimistic about the year ahead.

“Companies are still pretty uncertain about the situation and what they can expect for the upcoming years,” Lara Zarges, economist at Germany’s ifo Institute for Economic Research, told DW.

So why the investor optimism?

“Ironically, I think there’s a strong argument to make for an inverse correlation between economic performance and stock market performance,” Ben Ritchie, head of developed market equities at investment company abrdbn, told DW.

On Thursday, the index opened at around 17,655 points, 0.3% above the previous day’s closing level, after finally breaking 17,600 on Wednesday. Covestro, Zalando and Siemens were at the top of the price list, followed by Beiersdorf, Fresenius and Bayer.

“The revenues for these companies aren’t in Germany,” Ritchie said, referring to the 40 companies that make up the DAX. “So the German economy doesn’t matter.”

Despite troubles at home, investors are optimistic about how Germany’s biggest companies will perform

SMEs don’t share the optimism

The retail customers and production sites for these large, international companies are primarily located outside of Germany. The health of those markets, along with structural developments within specific industries and companies, has a far greater influence than the domestic economy does on DAX performance, says Ritchie.

But according to Zarges, that’s not the case for small and medium-sized enterprises (SMEs) in Germany, which employ over 50% of the country’s workforce, but aren’t represented in the DAX index.

“These companies also participate in global supply chains, of course, but they face the problem that wages here in Germany have risen. Production costs have risen. And energy is still expensive,” she said.

Weak economy could be a strength for equities

The strength of the US economy is therefore probably more significant to the DAX’s latest streak than Germany’s is. High coronavirus relief spending and low energy costs there have helped boost consumer spending.

Cooling inflation is likely bolstering investor sentiment, too. Consumer price growth has eased significantly in many countries, Germany included. The government forecasts it dropping from 5.9% in 2023 to 2.8% this year, close to the European Central Bank’s (ECB) target of 2%. If the trend keeps up, lower interest rates are likely to follow.

The high borrowing costs introduced to curb inflation was a blow to both retail and corporate investing as well as consumer spending. But investors now appear optimistic that cash will soon be flowing more freely through the economy, and that this will boost corporate profits.

And some think the sluggish domestic economy could be a good thing.

For Germany’s largest companies, a weak German economy could lead to a cheaper euro as well as lower borrowing costs as the ECB tries to stimulate spending in Europe. At the same time, stagnation would have little impact on revenues due to their large overseas markets.

“I actually think that the biggest bull case for Europe is an increasingly stagnant domestic economy,” Ritchie said.

Edited by: Tim Rooks

Author: Kristie Pladson