Handelsblatt financial editor Jürgen Röder argues that rising share prices will make 2017 a good year to buy.
The DAX, the index of Germany's top 30 publicly listed firms, seems to know only one direction and that's up. The DAX has been in a long-term ascent since 2009, interrupted by only two major corrections in 2011 and 2016. Visually, that can be seen in the price curve of the last 200 days, the average price on trading days during the last 12 months. To say it simply, if the line rises, it's an upward trend. That’s a good sign for the price potential of the DAX; it’s what professional investors pay attention to.
But even a long-term trend must come to an end. High interest rates combined with investor greed could stop it, as the technology boom at the turn of the millennium demonstrated. Back then, investors snatched up the stocks of companies that had never made a profit. Share prices rose and rose. Even the established companies of the Old Economy were pulled along, which caused the DAX to rise rapidly.
At the same time, prime interest rates in Europe and the USA rose to nearly 5 percent and more. Then came the shock: Within three years, the DAX fell to around a quarter of its peak value.
Is history repeating itself at the moment? Admittedly, the U.S. Federal Reserve is aiming at three interest-rate hikes. But at 0.5 to 0.75 percent, the prime rate is far lower today – so there is no reason to worry. And in the euro zone, no one seriously believes that the reins will soon be pulled tight on monetary policy.
Nor is an exaggerated euphoria evident among investors. In the Handelsblatt survey regarding chances for the stock-market year 2017, most investors were skeptical. They don’t expect much from the DAX through the end of the year, consider the Trump rally to be fleeting and expect falling share prices soon.
Paradoxically, those are positive prerequisites for a successful stock-market year. The stronger the skepticism on the stock market, the larger the number of those who could still come aboard once share prices have begun to rise.
When there is a state of euphoria, on the other hand, purchases have often already been made by all those who are inclined to buy; then, the only possible direction is downward. “As a rule, share prices rise on a wall of worries” is a stock-market saying. It is this mixture of skepticism and continued low interest rates that could cause the DAX to rise in 2017 as well. Especially since the overall market, with a good 14-fold valuation of company profits, is in a middle price category that is a classic sign of a long, intact upward trend.
There are risks of a downward spiral because of rising political uncertainty in the world.
But fellow financial editor Georgios Kokologiannis thinks that there are rising risks in the markets and advises caution.
At current share prices, DAX firms are expensive. Chances for sustainable returns on the stock markets meanwhile stand in no reasonable proportion to the extant risks. Share prices have detached themselves far too much from the actual performance of companies. Even if the profits of DAX-listed companies should rise this year by a solid 8 to 10 percent as expected, that wouldn’t even justify the current index level of the DAX, which is above 11,500.
The phenomenon isn’t new: For more than six years now, the DAX and profits from the blue chips have clearly diverged. While the earnings before interest and taxes (EBIT) of firms rose only 24 percent compared to 2010, share prices for the elite companies of the DAX rose more than three-and-a-half times more vigorously during that period – the DAX as a hope bazaar.
Optimists basically justify their hope for rising corporate earnings with currency-exchange effects in exports through an ongoing devaluation of the euro. But hope alone isn’t enough. On the contrary: Already this year, experts expect an urgent discussion about the beginning of the end of the extremely loose monetary policy in the euro zone. So the weak euro won’t endure.
Profits based on currency effects are built on sand in any case. U.S. companies are losing competitiveness through the strong dollar; this puts a burden on Wall Street. Deutsche Börse, operator of Germany's largest stock exchanges, won’t be buffered against a correction in the leading stock markets. Already today, U.S. stocks are extremely expensive and are at historic highs. Based on 2016 earnings, the relation between share price and profits on the leading S&P 500 index is 21.3 – more than 50 percent above the long-term average of a solid 14.
Even more alarming is the ratio of share prices to the revenues of companies, which is considered to be a more reliable risk indicator: Whereas companies can influence their results by special effects and stock buybacks, that isn’t so easy with sales figures.
In the meantime, the risk barometer has reached the level of its all-time high at the turn of the millennium. Shortly thereafter, the dotcom bubble burst. The duration of the bull market in that financial center that sets the overall tone provides reason for skepticism: The upward trend in the USA has lasted 92 months – 70 percent longer than the average of the 18 bull markets during the last 140 years. In addition, there are risks of a downward spiral because of rising political uncertainty in the world at the moment.