German Stocks How long can the DAX boom last?

This year, the German benchmark index could hit an all-time high of 14,000 points. Despite these record-breaking prospects, experts warn winter is coming.
It's raining money but how long can the good times last?

The bull market is powering through its ninth year, with almost all major banks expecting that the DAX, Germany’s leading stock market index, could soar by another 5 to 10 percent this year.

There’s only one fly in the ointment: Analysts always predict moderately rising prices. That was also the case at the beginning of 2008 – the year the DAX fell by a whopping 40 percent.

For now, there’s no talk of doom and gloom as investors ride one record wave after another. In November 2017, the index set its all-time intraday high of 13,525.56. And the markets seem well positioned to continue the rally in 2018. A group of technical analysts told Handelsblatt that this year, the DAX will pass the 14,000 mark for the first time in its history.

The strong euro could also put a damper on the heavily export-oriented DAX.

The current stock market trend is strong, according to Dirk Oppermann, a research analyst at DZ Bank. The attitude among investors is "let the trend continue,” he said. The breadth of the market, meaning the ratio of rising and falling equities, signals the upward trend will last. That's unlike the final phase of the IT boom 18 years ago, because this time around, the growth isn't being driven by just a few heavyweights like SAP and Deutsche Telekom; rather, stocks are rising in all sectors.

But warning signs are gathering on the horizon. Stock prices have been rising rapidly. In the US, the stock market indexes are setting new records almost daily. But the prospect of taking home profits in such a hot phase – thus sparking a domino effect among investors, sending prices downhill – grows with each euphoric trading day.

Tired after a nine-year run.

The strong euro could also put a damper on the heavily export-oriented DAX. The euro has gained 15 percent against the dollar in the past year. The more the euro rises, the higher the cost of European goods and services in the dollar zone, which weakens their competitiveness. On top of that, earnings made in the dollar zone are reduced as soon as companies convert them to euros.

Rising interest rates are another indicator. The US central bank, the Federal Reserve, has already raised interest rates five times in just over two years, and another three hikes are expected for 2018. Rising interest rates make bonds or savings accounts more appealing. Granted, the European Central Bank is still a long way from increasing interest rates, as in a monetary policy announcement last October, it decided to keep the central interest rate at 0.0 percent. The ECB did however start scaling back its bonds purchases.

That could spell trouble on the DAX. Independent analyst Klaus Deppermann warns prices could begin to tumble this fall, triggering a bear market that would stretch well into 2019. Price declines of 30 percent and more are likely, he thinks. That might drive investors to ditch volatile stocks and head for the safe haven of gold.

That's a glimmer on the horizon though; as for now, stocks are rising and no-one can say how long this nine-year boom may last.

18 p29 DAX-01

 

Ulf Sommer reports for Handelsblatt on companies and financial markets, Stephanie Ott is a journalist writing for Handelsblatt Global in New York. To contact the authors: [email protected] and [email protected]