The record message came as a surprise to many: Der German leading index Dax reached a record high of around 16,300 points last week. Despite the war in Ukraine and despite various crises such as inflation, the US debt dispute, the threat of recession and expensive energy. At the same time, the apparently crisis-resistant dax with a price increase of 15 percent since the beginning of the year, the US indices Dow Jones (+1 percent) and S&P 500 (+9 percent) were also clearly outperformed. What’s going on there? Should investors still get in now or rather take profits, especially since the record report from Friday promptly responded course reset followed?
The following overview shows the six points that investors should know. There were good reasons for the outperformance of the Dax (1-4) – but the Dax should have trouble maintaining its current level (5 and 6).
1. Record Profits and Record Dividends
The record rally is only surprising at first glance. Prices on the stock market usually follow the profits of the companies – and the Dax companies reached a record level in 2022 in terms of both operating profits and distributed profits (dividends).
The operating profit of the 40 Dax companies rose by 3.4 percent in 2022 to a record amount of 171 billion euros, as calculated by the consulting company EY. According to calculations by the German Protection Association for Securities Ownership (DSW), the dividends that German stock corporations will pay out to their shareholders this year will increase by 9 percent to a record level of 75 billion euros. The car makers Volkswagen (22 billion euros), Mercedes Benz (20 billion) and bmw (14 billion) lead the profit ranking in the Dax, together with Deutsche Telekom (15 billion) and Allianz (14 billion). Some corporations such as BMW, Deutsche Post, Siemens, Telekom or Airbus even achieved the highest profit in their entire corporate history in 2022.
2. Surprisingly resilient in the first quarter
The party continued in the first quarter of this year. Although the profits of the Dax companies fell overall as expected, sales rose by a further 8 percent – also thanks to the China comebacks
after three years of the corona pandemic, from which the numerous cyclical stocks in the Dax in particular benefited.
“Despite a year-on-year drop in profits, the reporting season in the first quarter turned out to be significantly better than feared,” emphasizes Ulrich Stephan, investment strategist at Deutsche Bank. In the sectors of cyclical consumer goods, basic materials and utilities, which include Dax heavyweights such as BASF, Bayer, RWE and Covestro, profits were on average 18 percent above expectations, according to Stephan. In the industrial sector (Siemens, Airbus), profits even grew by 65 percent.
The two factors – further growth in sales, plus a smaller decline in profits than feared – mean that Dax shares are still in demand among investors. The current price-earnings ratio is currently just under 12 – and thus in the long-term average. Measured in terms of profits, the Dax is not even particularly expensive at its current record level – German stocks are still more favorably valued than US stocks. The S&P 500 is currently trading at 23 times earnings, and US tech stocks are currently twice as expensive as the Dax at 24 times earnings on the Nasdaq 100.
3. Dividends as a yield booster in the performance index
There is a very simple reason why the Dax has left the US index S&P behind in its recent record hunt: The Dax is a performance index. This means that the record dividends paid out are included. In the S&P, a pure price index, on the other hand, dividends are left out. “Dividends are a boost to returns for German equity investors,” says Mathias Beil, Head of Private Banking at Sutor Bank. “Over a period of 37 years (since 1986), the Dax including dividends has increased tenfold, but as a pure price index it has only increased sixfold.”
Conversely, this also means that if the dividends paid for the US index S&P 500 were also included, the performance of the S&P would look significantly better than that of the Dax, says Beil. The index of the 500 most valuable US companies has increased seventeenfold since 1986 and is far ahead of the leading German index with this development.
4. Less load from the tech slump
Unlike the Dax, the US indices S&P 500, Dow Jones and Nasdaq 100 are still far from their record levels. In addition to the calculation of German dividends, another factor also plays a role: the composition of the index. With SAP, Infineon and Deutsche Telekom, relatively few tech stocks are represented in the Dax, so the index did not suffer so much from this last year Big Tech break-in – so didn’t have to catch up as much to reach the new record level.
On the other hand, the price rally of the US indices up to January 2022 was mainly driven by the price gains of the tech heavyweights Amazon, Apple, Microsoft, Tesla, Nvidia and Meta. In the stock market year 2022, these titles each lost around 50 percent or more in value, only Microsoft (minus 30 percent) and Apple (minus 20 percent) were able to limit their losses. Now that concerns about further significant interest rate hikes by the US Federal Reserve are easing, the Nasdaq 100 is also picking up again and, since the beginning of 2023, has increased by 28 percent, significantly more than the Dax (15 percent).
However, the composition of the Dax also entails risks. The many export-oriented companies in the Dax – above all from the automotive, mechanical engineering and chemical sectors – are more dependent on the global economy and global demand. A risk given the uncertain prospects.
5. Profit margins are under pressure – new qualities are in demand
However, the greatest risk probably depends on one question: Will most of the DAX companies, which have made excellent earnings in recent months despite multiple crises, be able to maintain their profit margins? There are many arguments against it, because the winning party was characterized by special factors for a long time. Take the car industry as an example: Volkswagen, Mercedes and BMW were able to keep prices high due to a lack of parts and a tight supply, as the waiting lists for new cars were long. In the meantime, the supply chains have stabilized, global production is ramping up again, and the next discount battle is on the horizon. Even Tesla currently puts sales ahead of profits
, so that the German car manufacturers also have to adjust to falling profit margins. The Volkswagen Group has already given the signal for its radical austerity program for the core brand VW
: Now it’s about reorganization and restructuring in order to continue to play successfully.
“The production costs of many companies are still high. In addition, many are threatened with an increase in personnel costs,” says Markus Wallner, market analyst at Commerzbank. Margins are likely to be under pressure, not just for German automakers, but also for “defensive” companies such as Henkel and Fresenius. “This increases the pressure for restructuring, which companies like BASF have already announced,” says Wallner. Above all, companies such as FMC, Adidas, Covestro or Siemens Energy have the opportunity to quickly improve their operating earnings through successful restructuring. Whether giants like VW will be able to do this just as quickly remains to be seen.
6. Macro risks remain
One thing is certain: for the majority of Dax companies, the environment in 2023 has become rougher. In the current year it will become much more difficult to defend the profit margins that have currently been achieved. Especially since a recession is still looming in the USA and one Agreement in the US debt dispute is not yet sealed. The expectation already priced in on the stock market that the The US Federal Reserve only raised interest rates twice at most in the second half of the year, has yet to be confirmed.
In order to stay at the current record level, the majority of Dax companies will no longer have to prove themselves to be masters of profit, but masters of restructuring.