Handelsblatt Exclusive Germany's Bullish Mood

Germans are more optimistic than most countries about their economic situation. Investors are doubtful that will translate into further gains for the blue-chip DAX, two exclusive surveys for Handelsblatt find.
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The bull outside Frankfurt's stock exchange has the upper hand - for now.

It’s been a year of political upheavals, terror threats and civil wars, but that hasn’t slowed the economic optimism of the Germans.

Consumers in Europe’s largest economy are entering the New Year in a more bullish mood than most of their peers, according to an exclusive survey by the online polling firm YouGov for Handelsblatt Global.

Some 60 percent of Germans expect the country’s economic situation to improve or stay the same this year. That’s more hopeful than any other of the seven countries surveyed, including the United States, France and Britain.

If only investors shared that optimism. A separate Handelsblatt survey of bank analysts found that forecasts for the path of Germany’s blue-chip DAX stock index are decidedly mixed.

It’s not that the DAX is doing poorly. Stock markets in New York and Frankfurt have rallied in the wake of Donald Trump's unexpected presidential election victory, setting new records on the expectation that the Republican will slash taxes and make massive investments in infrastructure.

The Dow Jones Industrial Average is close to breaking the psychologically-important mark of 20,000 points, which would cap a series of record closes for the 120-year-old benchmark index. Even the decision last month by the Federal Reserve chairwoman Janet Yellen to tighten the U.S. central bank's loose monetary policy, raising benchmark interest rates a quarter point from 0.50 to 0.75 percent, hasn't slowed the rally.

Even as the rally slows to a crawl in the new year, investors will have little choice but to continue buying stock.

The post-election euphoria on Wall Street has made waves across the pond, where the Frankfurt stock exchange has also reached new highs. The DAX, a measure of Germany's 30 largest companies, broke the 11,000-point mark before Christmas and set a new high for the year. The mid-cap MDAX index did even better, climbing to a record high of more than 22,000.

But is it all a bunch of hot air? That depends who you ask. A number of analysts fear the rally may slow to a crawl in 2017, according to Handelsblatt's survey of 29 capital market experts at leading international banks.

On average, the experts forecast that the DAX will rise to 11,724 points by the end of 2017, which would cap a 2-percent annual gain from the final close of 11,481 at the end of 2016.

If those predictions are correct, it would mark a 220-percent increase from the worst depths of the 2008 financial crisis. But it's still 700 points below the DAX's all-time high of 12,390 points.

Even as the rally slows to a crawl in the new year, investors will have little choice but to continue buying stock, given the low return on bonds. While analysts expect the interest on German 10-year bonds to triple in 2017, the return will still remain relatively low at 0.62 percent.

German stocks, by contrast, will maintain a solid price-to-earnings ratio. While shares have grown relatively expensive in the United States with a price-to-earnings ratio of 17, the German DAX will remain attractive with a ratio of 14.


Like the stock markets, the economy will also grow at a modest pace in 2017, according to expert projections. Most see the GDP expanding at just under 2 percent. Berenberg Bank, for example, forecasts growth "that is not too hot and not too cold" and doesn't foresee any bubbles on the horizon that could lead to recession.

Consumers in Germany share that optimism – unlike much of the rest of Europe. A full 76 percent of Germans said they expect their own household’s financial situation to improve or stay the same over the next 12 months. Just 19 percent believe they’ll worse off, while 60 percent expect a stable German economy as a whole, according to the Handelsblatt Global/YouGov poll.

Compare that to neighboring France, where 40 percent said they expect their own situation to get worse this year, and 33 percent of British citizens polled said the same.

Only the notoriously optimistic United States compares to that German level of hope: 70 percent of Americans expect their own economic situation to hold steady or improve in the coming year.

That bullish attitude also translates into a surprisingly high approval level for the government, at least compared to other countries. The YouGov poll found that 44 percent of Germans believe Berlin is doing a good job handling the economy, though 47 percent believe the opposite.

Berlin should be happy with that kind of figure in today’s low-growth, populist-driven Europe. Just 17 percent believe in the French government, for example, while only about a third are happy with Washington’s management of the world’s largest economy.

Whether that optimism will translate into good times for Germany’s export-driven economy is another matter. Many companies are more reliant on spending outside of Germany than within it – but there are some good signs here too.

For many forecasters, the euro-dollar exchange rate could prove particularly beneficial for German exporters. Many analysts are predicting just a slight $0.01 increase in the value of the euro to $1.06. Some even see it going in the opposite direction.

Deutsche Bank, however, sees the euro actually falling to $0.95 by the end of 2017, as the dollar gains in value due to a "massive, multi-year fiscal expansion" that would allow the Federal Reserve to hike interest rates again.

"A fall in the euro gives German exporters reason to hope," said Clemens Fuest, president of the Ifo Institute for Economic Research in Munich.

According to France's BNP Paribas, modest growth will lift Germany's export-dependent economy while the European Central Bank's loose monetary policy will fuel domestic consumption.

Based on these two trends, the French bank is more bullish than other financial institutions and predicts that the DAX will rise to 12,300 points by the end of 2017, just 390 points shy of its all-time high, for an annual gain of 7.3 percent.

Other analysts, however, are more pessimistic about the outlook for 2017. DekaBank, which trades securities for Germany's cooperatively run savings banks, and the regional National-Bank project that the DAX will fall nearly 500 points to 11,000 next year.

Dirk Gojny, an analyst with National-Bank, views the stock market rally with skepticism. Many of Germany's leading companies, such as Volkswagen and Deutsche Bank, face intense legal and regulatory scrutiny that could push down their share prices in the coming year.

In the case of Deutsche Bank, for example, 50 percent of analysts are telling investors to sell their stakes in Germany's leading financial institution, according to the business news service Bloomberg.

Investors remain skeptical of Deutsche Bank even after it managed to negotiate down a settlement with the U.S. justice department over its trade in junk mortgage-backed securities. Deutsche agreed to pay $7 billion to make amends, half of the $14 billion originally threatened by Washington.

The bank is no longer under pressure to raise capital to plug a hole in its financing. Still, analysts forecast that its stock price will fall by nearly a fifth to €13.89 this year.

Andrew Combs with Citigroup, for example, views Deutsche shares as overvalued and Credit Suisse puts the German bank's stock in the underperform category.

Deutsche Bank isn't the only flagship German company under pressure. The country's flagship airline, Lufthansa, will also face turbulence in the new year, with 60 percent of analysts recommending investors to sell their stock in the air carrier as the industry faces overcapacity.

But the outlook isn't all bad for German companies. The health care technology company Fresenius Medical, the broadcaster Pro Sieben Sat 1, the software company SAP and the chemicals and pharmaceuticals company Merck all have an upside potential of 5 percent in 2017.


Robert Landgraf is a senior financial correspondent for Handelsblatt based in Frankfurt. Christopher Cermak is an editor for Handelsblatt Global in Berlin. To contact the authors: [email protected] and [email protected]