Ignoring the economic downturn, the German stock market surges to record highs

Dim economic prospects, but major stock indices are rising against the trend? Germany's market performance is contrary to its fundamentals, attracting widespread attention from investors.

Data shows that Germany's recent economic outlook is bleak: Germany's August manufacturing PMI final value is 42.4, the lowest since March 2024; Germany's GDP in the second quarter fell by 0.1% quarter-on-quarter, private consumption fell by 0.2% quarter-on-quarter, and investment fell by over 2%.

Despite Germany's economy hovering on the brink of recession, the stock market performance is unexpectedly robust: the Germany DAX index has risen by 13% so far this year. However, as investor and business confidence indicators suggest further economic downturn in the future, investors are skeptical about whether the index can continue its gains.

Downturn in the automotive manufacturing industry, rising bankruptcy rates among businesses, political turmoil... Germany's economic outlook is clouded

As one of the economic pillars, the German automotive industry is also mired in a downturn, dragging down overall economic growth. The stock prices of Volkswagen, BMW, and Porsche all fell by more than 11% in 2024. Volkswagen stated on Monday that it is considering closing its factories in Germany for the first time and abolishing wage agreements to further cut costs.

"It is clear that the company is increasingly giving up hope for an economic recovery," said Ralph Solveen, economist at Commerzbank, "which is not a good sign for the German economy in the coming months."

Previously, Wall Street News analyzed that the German stock index has been able to detach from its fundamentals and move independently, mainly driven by support from financial stocks. In the past month, the German financial sector has risen by 11%, with leading gains from Hannover Reinsurance (18%), Munich Reinsurance Allianz (12%), and Deutsche Bank (12%) among the DAX heavyweights.

However, banks are now increasing provisions for bad loans, with an increase of nearly 50% in the first half of the year.

This phenomenon seems contradictory, but the underlying reason is the significant increase in bankruptcy rates among German businesses. According to data from consumer credit rating company Creditreform, in the first half of the year, the bankruptcy rate of German companies increased by nearly 30%, reaching the highest level in a decade.

In addition, the [political situation in Germany](https://wallstreetcn.com/articles/3726691? The turmoil in Germany brings more uncertainty to the economy.

In regional elections on Sunday, the center-left Social Democratic Party (SPD) led by German Chancellor Olaf Scholz lost to the far-right anti-immigrant party Alternative for Germany (AfD).

German economists Marion Muehlberger and Ursula Walther from Deutsche Bank stated that this result "may further pressure the federal government coalition".

Investors remain bullish on DAX blue-chip stocks and are willing to pay a higher valuation for them

In early August, the German stock market suffered from global market sell-offs, wiping out most of this year's gains. However, the index has rebounded, rising 9.2% from its low on August 5th and closing at 18930.85 points on Monday, hitting a new all-time high.

Bloomberg journalists and strategists Jan-Patrick Barnert and Michael Msika analyzed that companies in the DAX index, which are large listed companies in Germany, have less dependence on the domestic economy compared to small and medium-sized enterprises. This is because these large companies are often multinational corporations with a wide range of businesses and a high proportion of export business.

Therefore, even if the German domestic economy is weak, the performance of these companies may not be significantly affected.

In contrast, the performance of the MDAX index, which consists of mid-cap stocks, is much worse, with a 5.5% decline this year, still about 30% lower than the record low of 2021.

Despite the challenges facing the German economy, investors remain bullish on DAX blue-chip stocks and are willing to pay a higher valuation for them. They are currently valuing DAX at almost 13 times estimated earnings, higher than the less than 10 times in October.

Bloomberg Intelligence strategists Kaidi Meng and Laurent Douillet stated that SAP has played a key role in the revaluation of the DAX index this year. As a German software giant, SAP has benefited from the AI boom, directly driving the stock price surge, significantly impacting the valuation level of the entire DAX index.

So far this year, SAP's stock price has surged nearly 42%. SAP now holds a 15% weight in the index, and its forward P/E ratio has jumped from 23 to 35 this year, reaching the highest level in at least 20 years.