Bloomberg News

DAX Protection at Three-Year High After Index Gains 15%: Options

October 13, 2011

Oct. 13 (Bloomberg) -- Investors are paying the biggest premium since February 2008 to insure against losses in Germany’s stock market as the nation’s cost to shield Europe in the debt crisis grows.

Implied volatility for iShares MSCI Germany Index Fund contracts expiring in three months was 1.36 times higher yesterday than the level for the iShares MSCI EAFE Index Fund, which tracks nations throughout Europe, data compiled by Bloomberg show. The ratio has climbed from the 2011 average of 1.15 even as the DAX Index rose 15 percent since Oct. 4, the biggest gain since 2008.

German Chancellor Angela Merkel said Oct. 9 that European leaders will do “everything necessary” to ensure banks have enough capital. Her nation is the biggest economy in the region and the largest contributor to the European Financial Stability Facility. German lawmakers voted on Sept. 29 to raise the country’s contribution to 211 billion euros ($291 billion) from 123 billion euros.

“Messy or not, Germany is going to have to pay up to deal with the European crisis,” David Kelly, who helps oversee $408 billion as chief market strategist for JPMorgan Funds in New York, said yesterday in a telephone interview. “What’s changed over the past few months is that the size of the bill just keeps getting bigger and bigger. And Germany is going to have to pay the biggest part.”

German Protection

Options investors are driving up the cost of protection from German losses as global equities surge the most since March 2009 on speculation European leaders will take action to end the sovereign debt crisis.

The MSCI All-Country World Index rose 9.6 percent through yesterday since falling to a 15-month low on Oct. 4. The implied-volatility ratio between the iShares exchange-traded funds for Germany and Europe has risen from 1.20 on Oct. 3, which was the lowest level since Aug. 25, Bloomberg data show. The ETFs trade in the U.S.

Stocks surged after Merkel and French President Nicolas Sarkozy said Oct. 9 that they will deliver a plan to recapitalize banks and address the Greek debt crisis by Nov. 3. Yesterday, European Commission President Jose Barroso called for the reinforcement of banks, the payout of a sixth loan to Greece and a faster start for a permanent rescue fund. The euro zone is Germany’s biggest export market.

“We’re entering a period of lots of austerity measures in the euro-zone countries, which will also weigh on German exports,” Markus Steinbeis, head of equity portfolio management at the Unterfoehring, Germany-based unit of Pioneer Investments KGmbH, which oversees about $221 billion, said in a telephone interview yesterday. “I am not too optimistic for the first and second quarters of 2012, with a risk of zero growth -- if not a recession.”

Stock Valuations

Valuations for German equities may be low enough to spur a rally. The price-earnings ratio for the DAX Index was 13 percent less yesterday than the MSCI All-Country World Index’s multiple. While it was lower last month, falling 24 percent below on Sept. 12, it’s still at a discount last seen in 2008, according to data compiled by Bloomberg.

“As value investors, we like to invest in Germany at the moment because the stocks there are extremely cheap,” Herbert Perus, head of global equities at Raiffeisen Capital Management, said in a phone interview from Vienna yesterday.

Price-earnings ratios are falling as German unemployment reached the lowest level since the country’s reunification two decades ago. The jobless rate dropped to 6.9 percent in September from 7 percent in August. That contrasts with the 9.1 percent unemployment rate in the U.S.

VStoxx Index

The VStoxx Index, the benchmark measure of European options, declined 6.3 percent to 35.77 yesterday, extending its retreat since Oct. 4 to 29 percent. It rose 8.3 percent, the most since Sept. 9, to 38.75 today. The Chicago Board Options Exchange Volatility Index, or VIX, slipped 1.8 percent to 30.70 at 4:15 p.m. New York time today, extending its drop since Oct. 3 to 32 percent.

The International Monetary Fund forecast 4 percent worldwide economic growth on Sept. 20 for this year and next, down from prior projections of 4.3 percent and 4.5 percent. Developed nations will grow 1.6 percent this year instead of the 2.2 percent expected in June, and 1.9 percent next year instead of 2.6 percent, the IMF said.

Commerzbank AG lowered its year-end forecast for the DAX in September to 6,200 from 7,500, while WestLB reduced it to 6,300 from 6,900 the same month. The German index tumbled 33 percent from its May 2 high of 7,527.64 through its Sept. 12 low of 5,072.33, its lowest level since July 2009. The DAX has since rallied 18 percent.

“Worries over the euro-land debt crisis have been partly joined by increasing uncertainty over global growth,” Raimund Saxinger, a fund manager at Frankfurt-Trust Investment GmbH, which oversees about $22 billion, said in an e-mail yesterday. Since Germany’s market is linked closely with global growth, “it seems natural that it should be seen as more risky in times of that uncertainty,” he said.

--With assistance from Jeff Kearns in New York. Editors: Nick Baker, Joanna Ossinger

To contact the reporters on this story: Cecile Vannucci in Amsterdam at; Julie Cruz in Frankfurt at

To contact the editors responsible for this story: Nick Baker at; Andrew Rummer at

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