Stock markets around much of the world are regularly breaking records.
The Dow Jones Industrial Average hit another record high last week. European stocks traded at seven-year highs on Monday. Germany’s benchmark DAX index of the country’s 30 largest companies topped 11,000 at the start of February and hasn’t looked back.
And yet it is Germany’s lesser known mid-cap index, the MDAX, a collection of 50 medium-sized firms, which has shown the strongest gains over the past year, and indeed over the past two decades since it was founded.
The MDAX on Friday climbed above 20,000 for the first time in its nearly two-decade-long history, closing at 20,035.22. Since the start of January the index has jumped 18 percent – stronger than any other major index in Europe or the United States.
For market watchers, the rise of the index is a sign that investors are increasingly betting on Germany’s economy – the largest in Europe and arguably its most stable since the 2008 financial crisis.
Unlike its parent, the DAX, the mid-cap index is a truer representation of the diversity of German firms. It is also the index that has most profited from a major shift in Germany’s economy over the last two years – economic growth is being driven more and more by consumers willing to spend money, as well as export-heavy companies that are looking for growth abroad.
“The MDAX represents the German economy much better than the DAX,” said Björn Glück, portfolio manager at the Frankfurt-based asset management group Lupus Alpha told Handelsblatt.
While the DAX has a strong bias towards automakers and chemicals producers, the MDAX includes a more diversified mix of machine tools producers, real estate firms and media companies.
The MDAX is much more export-oriented. The DAX has been held back by banks and insurers. Ludwig Donnert, Portfolio Manager, Orca Capital
“All of these companies are profiting from Germany’s strong domestic demand,” said Mr. Glück.
The MDAX isn’t a list of obscure German firms. It includes the German listing of Airbus Group, the largest company in the index by market valuation. It was Airbus that helped the MDAX over the hump on Friday as the plane maker reported a record profit. Other major names include Munich machine maker MAN, fashion retailer Hugo Boss and television channel RTL Group.
Some of these firms are also heavily export-orientated. Like many European stocks, they’re profiting from a euro currency that has declined sharply against the dollar over the past year.
“The MDAX is much more export-oriented,” said Ludwig Donnert, portfolio manager at Munich-based Orca Capital told Handelblatt Global Edition. “The DAX has been held back by banks and insurers.”
Mr. Donnert noted companies including Airbus, plane engine maker MTU Engines, construction firm Hochtief and cosmetics firm Symrise are among those that have profited strongly from the weak euro.
But exports and a weak euro are not the whole story. The explanation also lies in the index’s diversity, which experts say has helped it weather downturns at individual companies or sectors much better than the DAX. It doesn’t include sectors that have struggled of late with falling prices – such as oil companies.
Another explanation is that the MDAX includes smaller firms that have the potential to grow more quickly. Many of Germany’s medium-sized firms are focused on lucrative niche markets that they have been able to dominate for years. Compare that to industrial giant Siemens, for example, a conglomerate, Mr. Glück said, which can see its share price fall if only one of its sectors is struggling.
The MDAX, which launched in 1996 has shown a more solid performance than its larger parent over time. Deutsche Börse, which operates both indexes, has retroactively benchmarked each index back to a level of 1,000 starting in 1987.
While the DAX’s all-time high remains at 11,402, the MDAX on Friday climbed as high as 20,109.
Anglo-Saxon investors in particular have started to profit from investments in smaller German firms. Just look at Warren Buffett, who last month said he had acquired small family-owned Hamburg-based motorcycle parts maker Detlev Louis.
And yet there are some worries that the MDAX is overvalued.
They note that there are few bargains left – investors on average are paying about 18-19 times the 2015 profits expected for the 50 firms that make up the index. By contrast, the ratio of market valuation to earnings on the DAX is around 15.
Like many stocks around the world, Mr. Donnert noted that the index is being driven by a glut of liquidity fueled by cheap money being provided by central banks around the world. That includes the European Central Bank, which this week is set to begin a €1.14 trillion bond-buying program.
“There will be technical corrections,” said Mr. Donnert. “New investments should be closely analyzed to see how much valuation potential still exists.”
But Mr. Glück argues that such valuation exercises ignore the fact that many smaller firms in Germany are paying high dividends. That in his opinion means many companies are valued too conservatively. He urges investors to look for stable firms with steady dividend payouts.
"If the business model is right, I don't think it's dangerous," Mr. Glück said.
Susanne Schier leads markets coverage for Handelsblatt in Frankfurt. Christopher Cermak is an editor with the Handelsblatt Global Edition in Berlin. To contact the authors: [email protected] and [email protected]