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DAX Has Best Year in Nine as ECB Acts on Debt Crisis

December 27, 2012

DAX Has Best Year in Nine as ECB Lifts Europe’s Profit Champion

Financial traders work at their desks beneath a display of the DAX Index curve at the Frankfurt Stock Exchange in Frankfurt, Germany. Photographer: Ralph Orlowski/Bloomberg

Germany’s DAX Index (DAX) is on course to complete its best year since 2003 this week, with bulls saying the gauge will become the first national benchmark in the euro area to exceed its 2007 peak for earnings.

The measure rose 29 percent in 2012 through the end of last week, the biggest advance of every developed market tracked by Bloomberg apart from Greece, underpinned by the European Central Bank’s pledge to buy the bonds of the most indebted members of the single currency. The DAX’s per-share earnings before dividends may end 2013 at 385.84 euros, beating 2007’s 385.24 euros, according to estimates compiled by Bloomberg.

This year’s performance marks a rebound from a 15 percent slump in 2011, when investors sold the DAX as a proxy for southern European markets where authorities had banned short selling. Earnings at exporters from Continental AG (CON) to Bayerische Motoren Werke AG (BMW) helped DAX profit grow by 9.3 percent in 2012, while earnings in France, the Netherlands and Spain shrank by an average 17 percent, data compiled by Bloomberg show.

“It has been an impressive rally and we think the structural and cyclical drivers for Germany are still there,” said Mathieu L’Hoir, an equity strategist at Axa Investment Managers in Paris. “Germany is well exposed to a rebound in global trade. The decline we have seen in risk premiums has yet to be reflected in German equities.”

2013 Forecasts

The fund manager predicts the DAX will climb about 13 percent next year, beating the rest of Europe. Three percentage points of that rally will come from dividends. Commerzbank AG, Germany’s second-largest bank, forecasts the benchmark will rise 11 percent to a record 8,500 next year, taking the valuation above its six-year average to the highest since 2010.

The DAX advanced 0.3 percent to 7,655.88 at the close of Frankfurt trading today, after the three-day Christmas holiday.

The Euro Stoxx 50 Index has rallied 15 percent this year. The gauge of the largest 50 companies in the euro area plunged 17 percent in 2011 as the single currency’s debt crisis forced Greece, Ireland and Portugal to seek bailouts. ECB President Mario Draghi said on July 26 that the bank would do “whatever it takes to preserve the euro.”

Draghi unveiled a plan to buy bonds at the central bank’s September meeting. The program, known as Outright Monetary Transactions, was intended to enable the ECB to regain control of interest rates and save the euro. The yield on benchmark 10- year Spanish government bonds has since fallen to 5.21 percent from a euro-era record of 7.75 percent on July 25.

ECB Oversight

European Union finance ministers this month agreed to give the ECB oversight of the euro area’s largest lenders, a step toward creating a single regulatory regime for banks.

Germany’s economy will probably expand by 0.8 percent in 2013, the European Union said in November. That compares with forecast growth of 0.1 percent for the combined economy of the 17 countries in the currency zone. Foreign investors have used the DAX to make bullish and bearish bets on political and economic developments in the currency zone, said Michael Quach, a strategist, at Smith & Williamson Investment Management Ltd.

“Companies there are doing well, benefiting from exports, but there has also been the effect of a sharp drop in risk aversion,” Abi Oladimeji, who helps oversee $4.3 billion as head of investment strategy at Thomas Miller Investment Ltd. in London, said in a phone interview on Dec. 12. “If you have to hold euro-zone securities, then German securities are the most attractive within the euro area.”

Continental, BMW

Continental has surged 82 percent this year. Europe’s second-largest maker of car parts on Oct. 31 reiterated its earnings targets for 2012, saying that growth in North America and Asia offset weakness in its home region. Analysts estimate that its operating income will gain 25 percent this year, according to data compiled by Bloomberg.

Continental generated more than 40 percent of its revenue from outside Europe in 2011, data compiled by Bloomberg show.

BMW has rallied 40 percent this year. Demand from China and the U.S. has shielded Munich-based BMW from the debt crisis in Europe, where the car market may shrink by the most in almost two decades this year. The world’s biggest maker of luxury cars on Dec. 7 targeted higher sales and profit next year. Revenue will probably grow by 10 percent in 2012, according to analyst estimates compiled by Bloomberg.

Per-share earnings excluding dividends for the DAX will grow 3.5 percent in 2013, according to estimates compiled by Bloomberg. They increased 9.3 percent in 2012 and 21 percent in 2011, an average growth for the three years of 11 percent.

Sliding Earnings

Earnings for the Netherlands’ AEX Index (AEX) fell 12 percent in 2012, the forecasts show. Profits for Spain’s IBEX 35 Index and France’s CAC 40 Index dropped 32 percent and 6.3 percent, respectively. Positive earnings for Italy’s FTSE MIB Index will contract for the fourth time in five years, Bloomberg data show.

All 11 of the largest western-European equity benchmarks other than the DAX will fail to beat their 2007 earnings next year, according to analyst estimates compiled by Bloomberg through Dec. 17.

Commerzbank equity strategists Andreas Huerkamp, Markus Wallner and Gunnar Hamann forecast in a Dec. 6 note that the DAX will end 2013 at 8,500, an 11 percent advance from the close of trading on Dec. 21.

The German benchmark, which tracks the total return of stocks including dividends, will climb to 12 times next-year earnings from 10 times last month, the strategists forecast. They based their estimate on a global economic recovery and a “successful” OMT program by the ECB, they wrote. The index last traded above 12 times future earnings in 2010, Bloomberg data show.

‘Perfect Environment’

“We see improving leading indicators across the world, and due to the globalized nature of German companies, this would be the perfect environment for the DAX for next year,” Wallner said in a phone interview on Dec. 17. A year earlier the strategists forecast the DAX would rise 22 percent in 2012.

China’s manufacturing industry expanded for a second month in December, underscoring optimism that the economy would recover from a seven-quarter slowdown. In the U.S., a Commerce Department report showed that durable-goods orders increased in November more than economists had projected.

Risks to the DAX’s performance in 2013 include the end to U.S. tax breaks that may curb economic growth, Germany’s election of a new parliament in September, and Spain’s delay in deciding to apply for OMT support, Commerzbank said.

Slower Growth

Lars Slomka and Jan Rabe, strategists at Deutsche Bank AG, are less bullish. Germany’s biggest bank predicted on Nov. 26 the DAX will climb 4.5 percent to 8,000 by the end of 2013. That’s about 1.2 percent excluding dividends. The Frankfurt- based bank’s European equity strategists forecast a 12 percent price gain for the Stoxx 600. A Deutsche Bank spokesman said Slomka and Rabe were not available to comment about their forecasts.

Smith & Williamson’s Quach said the ECB has succeeded in removing Europe’s “tail risk,” helping offset the negative forces of deleveraging. This should continue to underpin German stocks’ outperformance, he said.

“The overall growth environment is likely to be modest, but is also likely to be somewhat protracted,” Quach, who helps oversee $19 billion, said in an interview on Dec. 18. “The exposure to the right part of the global economy means that Germany is likely to fare better again next year.”

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net

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


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