The secret to one of Europe’s best-performing stockmarkets

Source: Live Mint

A COUNTRY BATTLING recession, high energy costs and political uncertainty may be an unlikely home for Europe’s hottest stockmarket. But Germany’s DAX index, the benchmark for its 40 largest publicly traded companies, rose by 12% in dollar terms last year, making it one of the best-performing indices in Europe (see chart 1).

View Full Image

(The Economist)

Although stockmarkets often reflect the health of an economy, and investor confidence in it, the relationship is not always straightforward. Indices dominated by global firms can thrive even when domestic conditions are weak. As in many northern European countries, most of the revenues for companies listed in Germany come from abroad.

By far the biggest factor in the DAX’s outperformance, though, is the presence of one superstar firm: SAP. The software company’s share price surged by 70% in 2024 owing to strong investor appetite for its AI offerings and partnerships with Microsoft, Meta and Nvidia. By pushing customers to its cloud platform and integrating AI tools into its software, the firm distinguished itself from rivals such as Salesforce and Oracle. An impressive two-thirds of the DAX’s gains last year can be attributed to SAP alone.

Similarly, Siemens, an engineering giant, had a strong year because of growing demand for its data centres. The performance of these two companies, which together make up more than a quarter of the index’s weighting, more than offset the poor performance of car companies, such as Mercedes, which are struggling amid Germany’s manufacturing downturn (see chart 2).

Political developments in Germany provided another boost. The DAX benefitted from a rally in November when the coalition government fell apart. A snap election in February has raised hopes that a new coalition might adopt more expansive fiscal policies, says Maximilian Kunkel of UBS, a bank. Many expect the next government to relax the debt brake, a limit on public borrowing that is enshrined in the constitution. Investors anticipate that inflation will continue to decline and the European Central Bank to cut interest rates, making stocks even more attractive.

The surge could lose momentum in 2025, warns Mr Krunkel. The next government, likely to be led by the centre-right conservatives, could leave the debt brake more or less intact. And the index’s reliance on a few heavyweight companies makes it vulnerable to changes in their fortune. A stockmarket downturn would diminish one of the few German bright spots.

From The Economist, published under licence. The original content can be found on www.economist.com

Read Full Article