DAX ETF: the German economy remains under pressure


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Investment thesis

There are many reasons why investors are betting on Germany. The country has the largest national economy in Europe, the fourth largest in the world in terms of nominal GDP, and well-developed capital markets. However, the German economy is facing serious threats today from slowing global economic growth and high inflation. I think these two reasons could lead to margin compression and lower profits over the next two months for a large number of German listed companies, precipitating a drop in the German stock index.

Policy details

The Global X DAX Germany ETF (NASDAQ: DAX) tracks the investment results of the DAX index. The index is made up of the 40 largest and most liquid companies listed on the FWB Frankfurt Stock Exchange. Broadly speaking, the DAX provides exposure to Germany, Europe’s largest economy by GDP.

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Wallet features

The index invests over 18% of total assets in industrials, followed by materials (representing ~17%) and consumer discretionary (representing ~15%). The three main sectors have a combined allocation of almost 50%. Over 60% of assets are invested in cyclical industries, which makes the DAX extremely vulnerable in my view to any economic downturn. In terms of geographic distribution, DAX invests exclusively in Germany.

Sector Breakdown of DAX ETFs

Global ETFs X

40% of the portfolio is invested in large capitalization value issuers, characterized as large companies where value characteristics predominate. Large-cap issuers are generally defined as companies with a market capitalization greater than $8 billion. The second largest allocation is made up of large cap mixed stocks.

Growth and Value of DAX ETFs

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The fund is currently invested in 40 different stocks. The top ten holdings represent 60% of the portfolio, with no stock weighing more than 11%.

Main holdings of the DAX ETF

Global ETFs X

Since these are stocks, an important characteristic is the valuation of the portfolio. According to Morningstar, the fund currently trades at a price-to-book ratio of around 1.5 and has a price-to-earnings ratio of around 12.

DAX ETF Value and Growth Metrics

the morning star

I generally consider a company/index trading at such low valuations to be cheap. However, the cyclically adjusted price/earnings ratio (CAPE) gives us a better indication of the real price of the index. Right now, DAX has a CAPE ratio of around 19, which is above its 2009 and 2020 lows. The index doesn’t seem to be hugely expensive in my opinion, but it’s definitely not good market given the fact that we are at a tipping point in the cycle where the likelihood of an economic downturn increases every week.



Negative outlook for the German economy

Germany has not been spared from recent inflationary pressures. On the contrary, the country is dependent on foreign raw materials, which makes it extremely vulnerable to geopolitical events such as the Ukrainian crisis, ultimately leading to supply shocks and inflation. Germany’s PPI recently hit a multi-decade high, highlighting the dire situation many German companies have found themselves in this year as rising input prices begin to squeeze corporate margins. The market hates shrinking margins, which should ultimately lead to lower multiples paid for these businesses.

Germany PPI


At the same time, the country is a net exporter, which makes it dependent on the health of the global economy. Recent lockdowns in a number of Chinese cities have definitely impacted global economic growth this year, as Germany’s PMI figures show. Although this is only a wake-up call at the moment, I think the situation can quickly deteriorate globally.

Global PMI activity


Domestically, the situation is no better. Consumer confidence in Germany is plummeting and recent figures marked a drop below the previous record set in May 2020 during Germany’s first COVID-19 lockdown. German consumers are under inflationary pressure and as a result are considering postponing spending, which reinforces some of the other negative economic trends.

Consumer Sentiment in Germany

Refinitiv Eikon

To put things into perspective, consumer sentiment in Germany is currently the worst in the Eurozone, and the country has a significant negative margin in this regard compared to other European countries such as Italy or France.

Eurozone consumer confidence by country


Perhaps one of the most interesting indicators pointing to an economic slowdown can be found in the GDP growth forecast for 2022. We can clearly see that expectations have been steadily lowered from a high of nearly 5% to third quarter 2021 to a low of 2%. in May 2022. Economists are quickly becoming aware of the idea that growth will be limited in 2022 and that a recession could very well occur in Germany in the next two months.

Germany GDP and Inflation Consensus Forecast 2022


Key points to remember

The DAX offers exposure to a basket of 40 German stocks. Over 60% of assets are invested in cyclical industries, which makes the DAX extremely vulnerable in my view to any economic downturn. I believe we are at a tipping point for the German economy and the likelihood of a recession has increased significantly over the past few months. Inflation is starting to squeeze corporate margins and consumer confidence, which has now hit a decade low, is plummeting. At the same time, the outlook for the global economy looks bleak, which is reflected in recent German PMI numbers. For the above reasons, I believe that the German stock market is at serious risk of a pullback from the current level over the next couple of months.


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