BREAKINGVIEWS-DAX record underlines Germany’s vulnerability

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Pierre Briancon

BERLIN, Jan 23 (Reuters Breakingviews) - Germany has been in recession for two years and yet the German bourse has outperformed all major European stock markets during that time. That is not a paradox, but the sign that the future of the country’s largest companies is decoupling from their home market. But if U.S. President Donald Trump’s threatened tariffs lead to a real shrinkage in global trade, investor enthusiasm for Germany’s big corporates might cool.

The DAX .GDAXI index, which comprises the 40 largest companies listed in Frankfurt, is up 25% since the beginning of 2024, more than twice as much as the EURO Stoxx 50 .STOXX50E, and is hovering around historical records. The UK’s FTSE 100 .FTSE is only up 12% over the same period while France’s CAC 40 .FCHI index has risen just 2%. The German stock market has also outperformed its European peers since early 2023, and even over a longer period since January 2020.

German stocks have soared even though the country has turned into an economic basket case, with GDP shrinking by a combined 0.4% in 2023 and 2024. The rally cannot reflect confidence in future economic performance either: Germany will grow by 0.2% this year, according to the central bank. While the economy stagnated in the last five years, growing by only 0.1%, investors in German stocks saw the value of their holdings jump by 55%.

In a nation of savers, this may have helped soothe the economic pain. But the DAX’s rip-roaring performance shows that the success of Germany AG owes little to the home country. The big companies that make up the DAX depend more on world markets, notably the United States and China, than on Germany. They only generate 20% of their sales in their domestic market, Deutsche Bank estimates. The bulk of their revenues come from the rest of the euro zone (26%), the United States (24%) and China (18%).

DAX companies, however, don’t appear overvalued. They trade at a combined 12.7 times forward earnings, according to LSEG numbers, slightly lower than multiples for the French CAC 40 and the EURO STOXX 50, one of Europe’s leading indices.

The old market adage that “stock markets aren’t the economy” has served German mega-caps’ shareholders well. But that might change. A Trump-triggered tariff war would hit their exports to their largest market. Its negative impact on the U.S. economy itself - through higher inflation - could also hurt. And China’s inability to recreate the heady growth rates of the past will compound the problem.

German-focused investors could soon have to look elsewhere to escape Germany’s economic reality.

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CONTEXT NEWS

Germany’s main stock exchange index, the DAX, is up 25% since January 2024, outperforming the STOXX Europe 600 index, up 11% since then.

The UK’s FTSE 100 is up 11.5% over the same period and France’s CAC 40 index up by 2%.