Dax Poised to Spring This Fall

The index, with its heavy weighting of industrial and cyclical issues, stands to gain as the German recovery builds steam.
Author:
Publish date:

BERLIN -- The rest of the summer will be stiflingly muggy, but expect the autumn to be agreeably brisk.

While the weather forecast for Germany is pleasant, the country's investment climate over the next few months may prove just as comfortable. While investors still have to slog through the dog days of summer, a confluence of appealing economic patterns appear set to help the country's equity market begin outperforming both their European and American counterparts.

Germany's performance of late wouldn't suggest such bright skies and gentle breezes. The benchmark

Dax

index is up just 4% since the beginning of the year. By comparison, the

Dow Jones Industrial Average

has surged 18%, and even the pokey pan-European

Euro Stoxx 50

has done better with a 6% gain.

The Dax Lags
Year-to-date performance of the Dow vs. the DAX

Source: Baseline

But with Germany finally showing signs of a rebounding domestic economy, as well as the benefits of a weaker -- and export-boosting -- euro and planned corporate tax reform, analysts are growing bullish.

"One should be preparing to buy at the moment," says Guenther Teufel, an equity strategist from

Bethmann Vermoegensbetreuung

in Frankfurt. "The coming summer doldrums is the right time to position oneself for the next upswing."

Of course, much of the Continent will likely see an expanding economy. And the weaker euro will help exports in all 11 of the countries participating in the much-ballyhooed monetary union, creating competition for German goods.

What, in particular, points in the Dax's favor? One factor is the index's heavy weighting of industrial and cyclical issues, which stand to reap substantial gains as the domestic recovery builds steam. Accordingly, shares of industrial concerns like

MAN

,

Linde

,

Thyssen Krupp

(THAGY)

and construction company

Hochtief

all stand to benefit.

Expectations of stronger growth, as well as higher U.S. Treasury yields, have already pushed German interest rates higher, sucking cash out of stocks and into fixed-income investments, says Bethmann's Teufel. Rather than disrupting the market, however, that's creating a buying opportunity, he says. Why? Because although those higher yields might plague stocks for the balance of the summer, an expected slowing of the U.S. economy will likely bring rates lower later in the year, making stocks look more attractive.

The euro's tilt toward parity with the dollar is also improving the

outlook for Germany's big exporters, which benefit as the weaker currency improves their price competitiveness, as well as their repatriated overseas earnings. Since the beginning of the year, when the euro made its splashy debut, the currency has lost as much as 13% against the dollar, although it has bounced back in recent weeks.

In fact, a rapid recovery in the euro could prove to be the market's undoing. After the euro rose to the $1.07 level on Monday -- its highest since mid-May -- stock markets across the Continent swooned, with the Dax losing over 2% to 5,206.

However, barring a collapse in the U.S. market, German automakers

DaimlerChrysler

(DCX)

and

Volkswagen

(VLKAY)

can still likely look forward to selling more cars at reasonably favorable exchange rates through the end of 1999.

And that should help make the investment temperature in Frankfurt nice and comfortable this fall.