Why is the German economy so weak, yet the German stock market is so strong?
Deutsche Bank believes that the main reason for the divergence between the performance of the German economy and the stock market is that the companies in the DAX index are mostly export-oriented, with domestic demand contributing little. Additionally, there is a significant difference in the industry composition between the DAX index and GDP, with the former's increase mainly driven by the leading stocks known as the "Seven Giants."
As the "locomotive" of the European economy, Germany's economic growth has been persistently weak in recent years, yet the stock market has been very buoyant. Data shows that since 2023, the German DAX stock market has cumulatively risen by 50%.
Why is there a significant disparity between Germany's economic growth and stock market performance?
In a recent research report, Deutsche Bank analyzed that the main reason for the disparity is that the companies in the DAX index are mostly export-oriented, with little contribution from domestic demand, and there is a significant difference in the industry composition between the DAX index and GDP, with the former's rise mainly driven by the leading stocks known as the "Seven Giants."
Why are Germany's economy and stock market diverging?
The report states that 80% of the revenue of DAX constituent companies comes from outside Germany, with the U.S. market accounting for 24%, while domestic companies only account for 20%. In contrast, Germany's GDP mainly relies on domestic demand.
Moreover, due to a large export exposure, the correlation of the German DAX index with global GDP growth (0.41) is higher than its correlation with German GDP growth (0.31).
In terms of industry composition, the report believes that there is a significant difference in the industry composition between the DAX index and German GDP. For example, sectors that contribute significantly to GDP, such as public services, transportation, real estate, and construction, have a very small share in the DAX index.
Additionally, over the past decade, the weight of industries in the DAX has changed significantly, with the share of growth-oriented companies and industries increasing, while the weight of underperforming sectors like chemicals and automotive has been reduced.
The report shows that the weight of the automotive industry in the DAX index has dropped from 17% to 7%, while the technology sector has risen from 8% to 18%.
In terms of individual stock performance, the rise of the DAX index is almost entirely driven by a few companies.
The report indicates that 98% of the DAX's rise in 2024 comes from the "Seven Giants," with SAP alone contributing 7.8% to the increase—if these seven stocks are excluded, the DAX index has only risen by 5% since the end of 2023 The "Seven Giants" are SAP, Deutsche Telekom, Allianz, Siemens Energy, Munich Re, Siemens, and Rheinmetall