Global Economics

Has Germany's DAX Topped Out?


Stock markets around the world are reporting record highs and the German bourse is no exception. Foreign investors are its biggest winners

Stock markets around the world are reporting record highs. And shares in German companies, considered globalization winners, are proving especially popular.

The banks were ready for the new record high of 8,151 points that Germany's stock market, the DAX, reached last Friday. They had already quietly set aside the forecasts they had issued early in the year and replaced them with substantially more optimistic numbers.

Deutsche Bank originally predicted that the DAX would reach 7,200 points by the end of the year. But when the booming financial markets pushed the DAX above 7,200 in April, the bank's chief investment officer, Klaus Martini, issued a new projection: 8,500 points. Analysts at Commerzbank, another major German bank, thought they were being optimistic when they predicted that the DAX would reach 7,400 by the end of the year. Now they too have changed their forecast to 8,500.

"The trend is your friend," seasoned investor and market guru André Kostolany used to say. He didn't need any weighty studies to back up his claim. One of the paradoxical yet relatively accurate pieces of market wisdom is that when prices go up they keep on going up.

Stock prices worldwide are climbing at a dizzying pace, a phenomenon that last occurred in the late 1990s. Investment-hungry Chinese, eager to profit from their country's economic boom, are storming the markets and on average have doubled their investments since the beginning of the year. Half of Asia is in a buying frenzy.

In some parts of the United States the real estate market is on the verge of collapse in some regions because of banks' risky mortgage lending practices. Short-term interest rates across the Atlantic are now almost as high as they were back in 2000 when a boom was followed by a crash. But Wall Street traders were only nervous for a week or two before celebrating a new record all the more enthusiastically last Thursday.

Foreign Investors the Big Winners

In Germany, it is foreign investors who have benefited most from the stock market boom. Indeed, foreigners already own more than half of all shares in German industrial icons like Siemens and BASF.

The news that Germany's major corporations had become winners in the globalization game spread far quicker abroad than at home. According to figures prepared by the German Central Bank, the Bundesbank, foreigners purchased stocks worth a total of €37.5 billion in Germany in 2006. Beginning in March of this year, however, many professional investors took advantage of the higher share prices to take home their profits. Between March and May, foreigner investors sold off a total of €40 billion in German shares.

What does all this mean for the majority of private investors who have missed the party so far? Is it too late to invest now?

The shockwaves caused by the crash in 2000 are still in evidence today. Since last October, Germany's cautious investors have sold stock funds worth a total of €11 billion net, because entry prices were beginning to resemble those of the crazy market years.

Experts like to point out that there is a key difference between 2007 and 2000. "Stocks are still cheap," says Jörg Krämer. According to the chief economist at Commerzbank, predictions of average price-to-earnings ratios of 13 are by no means astronomic. Krämer believes that corporate profits will continue to rise steadily -- by 11 percent in 2007 and by as much as 12 percent in 2008.

"Germany's consumer-based recovery is still to come," says Holger Schmieding, chief economist at Bank of America. Schmieding is highly optimistic that the positive impact of rising wages and lower unemployment in Germany will become more evident in the future.

Schmieding and his fellow experts predict US markets will experience substantial setbacks, particularly in the financial sector. "The lending crisis in residential construction is costing the US 1 percent of its annual growth," says Schmieding.

But when prices are on the way up, even risky factors suddenly begin appearing in a rosier light than before. Schmieding firmly believes that the US economy will rebound all the more vigorously in 2008.

'DAX Could Reach 10,000 by 2010'

And Commerzbank expert Krämer also approves of the fact that many investors are suspicious of the high prices. "They'll have to buy at some point," he says.

There are plenty of pessimists. An unusually large number of professional investors have bought put options at the Eurex futures exchange. The value of these options would skyrocket if there were a market crash.

"It is very important to hold on to scepticism," says Henning Gebhardt. Nevertheless, the fund manager at DWS, Germany's largest mutual fund company, would like nothing better than to see a renaissance of stock funds among private investors.

Gebhardt currently favors industrial and chemical company stocks. "Every portfolio should include stocks," says Gebhardt, "the DAX could reach 10,000 points by 2010."

Translated from the German by Christopher Sultan

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