Bloomberg News

DAX Beating S&P 500 by Most Since ’06 on Economy Optimism

April 03, 2012

The DAX Index is reflected in a sign inside the Frankfurt Stock Exchange, in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

The DAX Index is reflected in a sign inside the Frankfurt Stock Exchange, in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

German stocks are posting their best start to a year relative to the U.S. since 2006 as investors bet companies in Europe’s biggest economy will benefit most from improving global growth.

The DAXK (DAXK) Index, a German equities gauge that strips out gains from dividends, has surged 19 percent in 2012 after sinking to the cheapest valuation in at least six years last September. That’s the largest advance since 1998 and 6.3 percentage points more than the Standard & Poor’s 500 Index (SPX)’s increase, data compiled by Bloomberg show.

Germany’s benchmark DAX Index (DAX) has topped every developed market tracked by Bloomberg this year as Citigroup Inc. and BNP Paribas SA raised forecasts for economic expansion after efforts to tackle Europe’s debt crisis succeeded in bringing down borrowing costs from record highs. ING Investment Management ranks the nation’s stocks among the world’s best buys and Bank Sarasin & Cie. AG has been purchasing shares of SAP AG and Allianz SE.

“Global growth concerns have been priced out and euro-zone concerns have eased,” Bernd Meyer, the Frankfurt-based head of cross-asset class strategy at Commerzbank AG, said in a phone interview. “These elements are supportive for DAX outperformance as it’s a high-beta play on global growth.”

Overseas Sales

Companies on the DAX make more than 60 percent of sales outside Europe, according to data from Royal Bank of Scotland Group Plc. The remainder comes from within the region, where banks from Credit Suisse Group Inc. to JPMorgan Chase & Co. have reversed forecasts for a contraction in 2012 earnings.

The DAXK has rallied 11 percentage points more than the Euro Stoxx 50 Index this year, according to data compiled by Bloomberg. That’s the biggest gap since at least 1989, the data show. Even after the surge, the DAX, which includes returns from dividend payments, trades for 11 times estimated earnings, below the average valuation multiple of 11.9 over the past five years, the data show. The DAX slid 1.1 percent to 6,982.28 at the close in Frankfurt today.

“Germany is one of our preferred markets right now,” said Patrick Moonen, senior strategist at ING Investment Management in The Hague, which manages $163 billion. “It is not expensive and the export sector remains strong.” He spoke in a phone interview.

Record Borrowing Costs

The DAX posted a 15 percent slide in 2011 as mounting concern about the region’s debt crisis sent borrowing costs in Spain and Italy to records and economic reports missed estimates. Its price-earnings ratio reached 7.8 times projected profits on Sept. 12, the cheapest ever according to Bloomberg data that go back to 2006. The measure ended the year with a multiple of 9.9, a discount of as much as 34 percent to its five-year average.

German equities have risen in 2012 as economic data in the U.S. topped estimates and the European Central Bank lent more than 1 trillion euros ($1.3 trillion) to the region’s financial companies. Prices surged more than in America as investors sought markets where company earnings are more tied to economic growth, Commerzbank’s Meyer said.

BNP Paribas, France’s largest bank, increased its forecast for global economic expansion to 3.5 percent from 3.1 percent, according to a March 22 report. Citigroup raised its estimate to 2.5 percent from 2.4 percent the same day. Deutsche Bank AG lifted its growth target to 3.5 percent from 3.2 percent on March 26, citing the restructuring of Greece’s debt and the increased ECB lending.

Buying SAP

Philipp Baertschi at Bank Sarasin sad he’s buying shares in SAP, the biggest maker of business-management software. The third-largest company on the DAX, which made more than 50 percent of sales outside Europe in 2011, has increased its dividend by 11 percent in the past five years and has an indicated yield of 1.4 percent, Bloomberg data show.

“Investors are looking for growth but also for high yield and SAP fits very well into that theme,” said Baertschi, chief strategist at Bank Sarasin in Zurich, where he helps oversee the equivalent of about $110 billion.

Money managers may not only benefit from growth outside of Europe, Credit Suisse and JPMorgan strategists said. The Zurich- based bank increased its estimate for 2012 profit growth in the region to 1 percent on March 16, reversing a previous estimate for a 5 percent contraction. JPMorgan forecast on March 12 that European earnings will expand 5 percent, compared with a previous projection of stagnation.

German Growth

Germany’s economy will grow 0.8 percent in the first quarter, according to the median of 15 economist forecasts compiled by Bloomberg. The nation may expand faster in the second half of 2012, the Berlin-based Finance Ministry said in a March 22 report that cited recent indicators such as the Ifo business-confidence index.

The Munich-based Ifo institute said March 26 that its business-climate gauge, based on a survey of 7,000 executives, rose to 109.8 last month from a revised 109.7 in February. That’s the fifth straight gain.

This year’s rally may falter as concern about the euro region’s sovereign-debt crisis returns and improvements in economic data subside, according to Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets. The DAX had rallied 6.9 percent from the start of last year through July 7, before beginning a 21 percent slump through the end of 2011 as the contagion spread from Greece to Italy and Spain.

Overbought Market

“We’ve rarely seen a market that is so overbought as we see today,” Gijsels said in a phone interview from Brussels on March 28. “Liquidity has driven the market and people have embraced risk, but for that to be sustained we need substantial improvement in the economy. The hard data needs to follow in the second half of the year otherwise we risk a repeat of what happened last year when the crisis resurfaced in the summer.”

Even so, for Herbert Perus at Raiffeisen Capital Management there are enough investors that have not participated in this year’s gains to push equities higher.

“We still have a lot of extremely cheap companies in Europe and Germany is at the heart of this,” Perus, who helps oversee about $36 billion as head of equities at Raiffeisen in Vienna, said in a March 28 telephone interview. “There are so many opportunities even after the rally of this first quarter.”

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net


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