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Investors are valuing Germany’s 30-share Dax index more favourably than ever. Almost every trading day in the first half of February it reached a new all-time high until it broke through the 3200-barrier on February 12. The environment for further price gains has steadily improved. One reason is that bond yields are at historic lows. Falling bond yields and a steep curve have been fuelling the equity market for almost two years now. But euphoria explains just as much as the technical factors. Jörg-Peter Lühmann, a board member at German fund manager Deka, describes various elements as providing optimism in the equity markets: “The shareholder value movement, new cashflow calculations and the need for Germans to invest long-term in private pension schemes at the very least, each of these provides a reason for the equities market to remain stable.” Presumably local institutional investors will be driven to invest substantially in the equities market by the need to deliver better returns. Most German insurers still invest far less than the possible 30% of their portfolios in the equities market. Deka provides an insight into the potential demand for German equities. Only Dm8 billion of the Dm60 billion held in Deka’s funds is in equities; the rest is fixed-income. Now that equities are having more effect on German money supply (the scale of domestic investment in the Dm20 billion [$11.9 billion] Deutsche Telekom issue last November had a discernible effect on M3 that month) the Bundesbank is taking more notice of the development of the equity market. In its January report, the Bundesbank offered a rare analysis of the market, lending its support to champions of equity-market reform by calling for “the elimination of tax or legislation disadvantages suffered by equities in comparison with other forms of financing or investment”. In the second week of March, the Neuer Markt (the new market) for growth stocks opens for business and should eventually provide a stream of new companies going public. Since only 11 German companies went public last year (and one of them was Deutsche Telekom) investment in the German market is still overwhelmingly concentrated on blue chips. But Deutsche Morgan Grenfell equity research believes it’s a year for stock picking, because the performance of the German market will probably be very mixed from sector to sector. Banking stocks are supported by investors that support the general view that the restructuring and wave of mergers in German banking must begin soon. Although Deutsche Telekom’s initial public offering in November appears to have provided the spark for this new mood of optimism on the German bourse, the stock has not performed particularly well in the market so far. It is currently trading at around Dm32, slightly below the opening price on November 18. So how much further can the German equities market climb? One prominent fund manager, Udo Behrenwaldt of DWS, the funds arm of Deutsche Bank, went on the record in mid-February forecasting a Dax apex of 3350 points. He may have been proved wrong by the time you read this. |
