The recent turbulence in the stock markets has once again highlighted the importance of diversification in investing. Therefore, we turn our attention to our northern neighbor, Germany: Given the weak economic situation and the upcoming early federal election on February 23, 2025, many market participants wonder why the DAX (German Stock Index) surpassed the 20,000 mark at the beginning of the year and climbed from one all-time high to the next in January until recently. Furthermore, the DAX has seen two years (2023 and 2024) of significantly double-digit performance. Even the inauguration of Donald Trump last Monday left investors unfazed. Concerns about a potential trade conflict with the US and its impact on the European top export nation are currently being disregarded.
What are the reasons for the strong start of the German stock market this year?
According to a recent survey by Bank of America, international fund managers now favor stocks from the Eurozone. While in mid-December about a quarter of respondents indicated being significantly underweight in Eurozone stocks, there is now even a slight overweight. The overweight in US stocks, on the other hand, has been slightly reduced by many managers. From this, one could infer that the rise in the DAX this year was fueled by international capital flows. Additionally, the favorable valuation of European companies compared to their US counterparts could be a reason for the increased interest of investors in German blue chips.
Good and cheap?
When comparing common index metrics, the DAX is currently valued at 15.6 times the earnings of all DAX companies. For the S&P 500, this figure stands at 25.5. In terms of dividend yield, the DAX at 2.3% significantly exceeds the meager 1.2% yield of the S&P 500. The price-to-sales ratio shows an even more pronounced valuation difference. While DAX stocks are valued at only 1.14 times their sales, S&P 500 stocks are valued at 3.26 times sales (all data: Bloomberg, January 24, 2025).
European stocks are also supported by the ongoing interest rate reduction cycle in the Eurozone. At the end of January, the European Central Bank is expected to lower interest rates by 0.25%. Declining capital market interest rates are a significant factor in stock investments.
According to our investment strategy, we remain overweight in stock investments.
