DAX Record The French Connection

Germany’s benchmark index has cracked the symbolic 12,400 mark for the first time ever in the wake of centrist Emmanuel Macron’s performance in France. Will it last? There's still plenty of uncertainty ahead.
Picture source: Reuters

Centrist Emmanuel Macron‘s victory in the first round of France‘s presidential election is fueling optimism across the Rhine in Frankfurt. Germany‘s blue-chip DAX index broke the 12,400 mark on Monday, setting a new all-time record that had held for two years.

While US stocks already raced to record highs earlier this year, the buoyant mood has taken a while to reach Europe and Germany's shores. Now, just as the mood in the United States is souring, investors are betting the political and economic storms that have swept Europe might finally be parting. The  DAX, which includes Germany's top 30 companies, closed up 3.37 percent Monday at a record 12,454.98 in Frankfurt trading.

“Since the last record high in April 2015, the situation for Europe’s economy and companies has clearly improved,” Martin Lück, chief investment strategist at Blackrock Germany, told Handelsblatt.

France seems to have been the push markets needed: Polls indicate that Mr. Macron will defeat far-right candidate Marine Le Pen in France’s runoff in May, which would deal a major blow to the momentum of anti-establishment populist movements in Europe and provide some relief in Berlin.

Joachim Goldberg, head of the analysis firm Goldberg & Goldberg, told Handelsblatt that the markets in Germany are cautiously optimistic, but there’s no guarantee that DAX will continue its flight beyond 13,000 points, for example.

The economic data coming out of Europe is also looking up after years of doom and gloom. The euro zone grew by 1.7 percent in 2016, outpacing the United States for the first time since the 2008 financial crisis. In March, inflation hit the ECB’s golden mean of 2 percent for the first time in four years.

In Germany, Europe’s largest economy, corporate executives are more optimistic than they have been in years. The Ifo business climate index, which measures the confidence of German businesses, reached 112.9 points in April, a six-year high. That’s not particularly surprising given the fact that unemployment in Germany has reached record lows, exports are at all time highs and the country is running budget surpluses. Politicians are even talking about modest tax cuts as Germany heads toward federal elections in September.

German companies also still have room to grow. Johannes Müller, chief investment officer of Deutsche Asset Management, says that while many firms' shares are valued on a par with their US counterparts, European firms have a greater chance of growing their profits this year. That bodes well for further gains: "It would be highly unusual if the market fell sharply while company profits were rising," Mr. Müller told Handelsblatt.

The only way is up: Germany's DAX closed at a record high on Monday.

The good omens in Germany and Europe come as the United States descends into growing political and economic uncertainty. True, Donald Trump’s US presidential election victory drove Wall Street to all-time highs on the promise of massive tax cuts and infrastructure spending. And consumer confidence across the Atlantic has reached a 16-year high.

Yet the self-proclaimed dealmaker has floundered politically since taking office. In his first 100 days, Mr. Trump has proven unable to pass a single major legislative initiative, dramatically failing to repeal and replace Obamacare, his predecessor’s controversial health care reform. There are now growing doubts that Mr. Trump will be able to make good on his promises to cut taxes and revitalize US infrastructure. Indeed, Steve Mnuchin, the US treasury secretary, recently admitted it was unlikely that a tax reform package would land on Mr. Trump’s desk by August.

The positive developments in the euro zone and the political uncertainty in the United States combine to make Europe an increasingly attractive option for investors.

“Above all, non-European investors have until now often avoided attractively priced European stocks due to concerns about political risks on the old continent,” Mr. Lück said. “But now more and more investors are jumping on the European train.”

Joachim Goldberg, head of the analysis firm Goldberg & Goldberg, told Handelsblatt that the markets in Germany are cautiously optimistic, but there’s no guarantee that DAX will continue its rally and rise above 13,000 points. Mr. Trump’s struggles in Washington illustrate that political fortunes change quickly. And in Europe there’s still a great deal of uncertainty.

After all, Mr. Macron could still lose the runoff with Ms. Le Pen, who has vowed to hold referendums on France’s membership in the European Union and the euro zone. Most polls also failed to predict Britain’s vote to leave the European Union and Mr. Trump’s victory.

Europe’s banking sector, particularly in Italy, also remains fragile and the debt crisis in Greece could flare up again at any moment amid ongoing squabbles between the country’s creditors and the government in Athens. There are also the ongoing security challenges with Islamic terrorism and tensions with Russia in Eastern Europe.

Even with all the obligatory qualifiers, Mr. Goldberg believes the situation in Europe is looking better than it has for some time: “In principle I’m optimistic. The setbacks recently have been manageable.”


Robert Landgraf is Handelsblatt's chief correspondent for the financial markets. Jessica Schwarzer is Handelblatt's chief correspondent on stock markets in Düsseldorf. Anke Rezmer covers the investment fund industry for Handelsblatt out of Frankfurt, Germany's finance capital. Susanne Schier heads the private investment team at Handelsblatt's Frankfurt finance desk. To contact the authors: [email protected], [email protected], [email protected], [email protected]