Apathy settles in the Stock Markets. With investors watching central bank moves and the political standoff between Republicans and Democrats to raise the US debt ceiling, caution prevails in equities. Despite this prudence, in recent weeks some European indices have managed to set records. The last to do so was the German Dax. The German stock market joins the French one and on Friday it revalidated its all-time highs, a behavior that contrasts with that of other indices such as the Ibex 35. Its most immediate objective is to recover the levels prior to the fall of Silicon Valley Bank and it is one 41.7% of the maximum registered in 2007.
It must be considered in any case, as Natalia Aguirre, head of Income 4 strategy, recalls that the Dax does not discount dividends. To make a more exact comparison, it would be necessary to take the Ibex with dividends, an index that on April 19 marked maximums thanks to the fact that the Spanish listed companies have resumed shareholder remuneration, suspended with the pandemic. Alfonso de Gregorio, investment director of Finaccess Value, considers that the strength shown by the German Dax –in the year it rises 16%– is more solid than that of the French Cac (13.98%). “This is a more diversified index, which better reflects the economy,” he says.
The manager explains that the good behavior that the German stock market is registering is due to sectoral rotation. After a start to the year in which expectations of high rates encouraged the recovery of banks, in recent months the shocks experienced by regional entities in the US and the fall of Credit Suisse in Europe have consumed part of these rises. This, coupled with the moderation of tone by the Federal Reserve and the ECB, is acting as a brake. Although the European sector rose 8.7% in the year, it is still 10% below the annual maximum. And while in indices such as the Ibex and the Italian Mib, banks have a high weight, in others such as the Dax it is sectors such as the industrial sector that weigh the most.
As Sergio Ávila, an analyst at IG Markets, points out, the composition has a lot to do with the strength of the index. Listed software companies such as SAP (26.4%), engineering services such as Siemens AG (36.4%) as well as arms firms and automotive companies such as Rheinmetall (36.2%), Mercedes (16%) or BMW ( 25.3%) have served as a boost to the German stock market. At a time when investors have begun to turn towards quality firms with a defensive profile such as technology, the Dax has a wide range. Unlike the big US technology companies, German firms such as SAP and Infineon have a more solid business model, with strong cash generation, customer loyalty and solid results. Also, as pointed out by Gregorio in Infineon, the electric car represents a great opportunity because they need more semiconductors.
Along with the composition of the indices, macroeconomic developments also play a prominent role. After closing the fourth quarter with a contraction of 0.5%, in the first three months of the year the German economy managed to barely escape the technical recession. Ávila points out that the locomotive of Europe has begun to show signs of recovery in recent months, particularly in the services sector, which continues to expand. This resistance has contributed to the fact that the probability of recession in Europe has gone from 85% at the beginning of the year to 40% today.
De Gregorio explains that both on the German and French stock markets there is a direct correlation between energy prices and the evolution of the economy. Although in 2022 the outbreak of the war in Ukraine and the restrictions imposed on Russia pushed gas to an all-time high of $311, it is currently below $30. In other words, the lows of June 2021, when many of the mobility restrictions imposed after the outbreak of Covid were still in force. “The eurozone has avoided the deep energy crisis anticipated last year during the winter,” says Juan José Fernández-Figares, investment director of Link Gestión.
However, the highs of the French Stock Market are largely explained by luxury firms. These listed companies are an attractive option at times of high inflation due to their inelastic demand, to which was added in recent months the reopening of China. After the surge experienced in recent months, the weakness of the latest data published shows that, as Figares points out, expectations were somewhat inflated. For their part, Deutsche Bank experts point out that to prolong the rally it is necessary for profits to increase.
Along with the luxury firms, among the components of the Cac there is a high industrial weight. “We come from 2022 in which the industrial sector has captured the attention of investors and this pro-industrial inertia is maintained and benefits Europe, especially France and Germany,” says Víctor Alvargonzález, an analyst at Nextep Finance.
Margin to continue rising
Germany. Analysts at Spectrum Markets point out that if the Serix Index of Retail Investor Sentiment is anything to go by, they expect further bullish momentum. On May 22, the index prepared by the firm reached 106 points, a bullish level. “This suggests that retail investors continue to trust the German economy,” they point out.
France. Nicolás López, director of equities at Singular Bank, points out that the recent rises registered by the German stock market have been accelerated by the rotation of investors from luxury firms to technology companies, of which the Dax can give a good account . The lack of a miraculous rebound like the one expected in the macroeconomic data of the Chinese economy together with the demanding valuations registered by luxury firms have contributed to the fact that in recent sessions firms such as LVMH and Hermès have evaporated 30,000 million capitalization.
spain. The weakness shown by the Spanish market has been greatly influenced by the high weight of banks, the business with the worst performance in the last decade, and utilities, a highly regulated sector. López highlights the Spanish selective and orphan of growth companies that take over from entities and utilities, two businesses highly dependent on regulation, something that discourages investment from foreigners.
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