Welcome to 2016. Germany’s blue-chip DAX stock index fell 4 percent Monday, the first day of trading in the new year, after a Chinese economic indicator showed manufacturing in the world’s second-largest economy falling for a fifth straight month.
Germany’s leading stock index, which includes steel maker ThyssenKrupp, Deutsche Bank and BMW, fell far more than other European indices. It fell by as much as 3.8 percent in morning trading and was down 4 percent by closing at 10,314 points, marking its worst one-day drop since August and the worst start to the year in 25 years.
By comparison, London’s FTSE 100 fell just 0.5 percent, France’s CAC40 0.9 percent and Switzerland’s stock index 1.7 percent. China halted its stock trading on Monday after its own main share index fell by 7 percent, triggering an automatic suspension.
China is Germany’s fourth-largest export partner after France, the United States and Britain, accounting for €74 billion, or $80.8 billion, of goods such as cars, machines and other heavy equipment.
Volkswagen generates almost a third of its sales in China, making it the single largest market for the producer of VW, Audi and Porsche vehicles.
“Germany exports to China account for about 6 percent of all exports,” said Marco Wagner, a Frankfurt-based economist at Commerzbank. “What happens in China has an impact.”
China has become an important market for German blue-chip firms as well as smaller companies. Volkswagen generates almost a third of sales in China, making it the single largest market for VW, Audi and Porsche vehicles. Chip maker Infineon sells 20 percent of its products in China and BMW sells almost a fifth of its luxury cars there.
BMW shares were among the biggest decliners in the DAX index, falling 4 percent. Deutsche Bank dropped 4.3 percent, ThyssenKrupp 4.7 percent. Germany’s two largest utility firms, E.ON and RWE also dropped more than 4 percent each, although their exposure to China is small or negligible.
Not everyone, however, is expecting problems in China. Sports shoe maker Adidas posted record sales in the Asian country last year, its chief executive told German newspaper Süddeutsche Zeitung.
"For 2015, we will have made more than €2 billion in revenue in China, a record number," chief executive Herbert Hainer told the paper. "China is thereby our second-largest market after the United States, despite the economic problems there."
Mr. Hainer was also optimistic for this year, saying Adidas' order books for the first half of this year were full and expecting a two-digit growth rate for the brand Adidas in the United States.
Carsten Hesse, an emerging markets strategist at Berenberg Bank in London, said investors were overreacting to the weaker-than-expected purchasing managers’ index report released on Monday by Chinese business magazine Caixin.
“I would say this is more of a one-off daily development,’’ Mr. Hesse told Handelsblatt Global Edition.
Service industries, not traditional industrial production, now generate about half of China’s economy, Mr. Hesse said. “Investors might be overweighting the importance of the PMI Manufacturing reading versus the PMI Services. PMI Services are becoming more important to follow than the PMI Manufacturing,” he said.
In fact, a report measuring the development of China’s services industry that was released on January 1 showed the index rising to its highest level since August 2014, Mr. Hesse said. In addition, the Chinese equities market has a habit of starting slowly in the new year, he said. In the first days of trading a year ago, China’s benchmark stock index fell more than 4 percent, Mr. Hesse said, but by the end of January 2015, the index had recovered and finished up 7 percent from the start of the year.
China’s impact on German and European stocks would remain and create volatility, Commerzbank’s Mr. Wagner said. “Asia has become an important market. Emerging markets account for about 40 percent of German exports. Two decades ago this percentage was still around 20 to 25 percent,” Mr. Wagner told Handelsblatt Global Edition.
By the end of 2016, however, Commerzbank still expected the German blue chip DAX index to rise to 12,600 but with volatility throughout the year, Mr. Wagner said.
“German exports of 2.5 percent this year is considerably weaker than last year and the year before that,” Mr. Wagner said. “The big upwards driver for European stock markets is monetary policy. Negative effects will come from the real economy, such as China.”
The economy and German exports would also expand less than in 2015 as lower growth rates of China’s economy, the world’s second-largest after the United States, weighed on German businesses, Mr. Wagner said. Germany’s economy would expand 1.3 percent this year, following an estimated 1.7 percent growth in 2015, he forecast.
Stefan Kreuzkamp, chief investment strategist of Deutsche Asset & Wealth Management, also cautioned against overreacting to one-day stock developments. "More important is whether – and how significantly – growth slows and whether China moves ahead with further reforms," he told Handelsblatt.
Gilbert Kreijger is an editor at Handelsblatt Global Edition in Berlin, focusing on companies and markets. Kevin O'Brien is the editor-in-chief of Handelsblatt Global Edition in Berlin. He has more than 30 years of experience at newspapers, agencies and magazines in Germany, the United States and Austria. To contact the authors: [email protected] and [email protected]