Germany in excellent shape?

No, not at all! The German economy is in the doldrums. The country’s very important automotive industry is having a very hard time coping with intense Chinese competition (in China and in Europe) and weaker overall auto demand. The German machinery industry also suffers from weak Chinese demand, while the latter country was the single most important source of growth in this industry. Furthermore, Germany’s chemical industry is facing a hard time (much like in the rest of Europe) as it copes with higher energy prices than in other parts of the world and again due to poor demand. All of this translates into a PMI (Purchasing Managers Index) that sits at 40.6, a (very) low level. A figure below 50 points to a weakening economy.

Source: Econopolis, LSEG Datastream

The return of 'The sick man of Europe'

The political situation in Germany is somewhat similar to that in France (and some other neighboring European countries). This means it’s a big mess. More and more Germans are willing to vote for extreme parties, and the next federal elections are scheduled for September 28, 2025. Just like in France, this will most probably make forming a new government a Herculean task and complicate necessary reforms in the country. What’s more, the ‘Schuldbremse’—a rule that restricts annual structural deficits to 0.35% of GDP—makes things even more difficult. Additionally, Germany is starting to feel the pain of the greying of its population. In addition, Germany is a rather bureaucratic country, which slows reforms.

All in all, it's no wonder that Germany is called ‘The sick man of Europe’ once again. The previous time was in 1998 when the country’s growth lagged behind that of its European peers as the country struggled to grow following the reunification in 1990. History teaches us that a turnaround is possible, but it will take time and an enormous effort to improve the country’s economic fundamentals.

Source: Felix Mittermeier

Why the DAX index thrives despite Germany's economic challenges

People often think that there is a direct link between the performance of a country and its leading stock market. That is, however, not always the case. For an investor who takes a quick look at Germany's leading stock market index, things look good in Germany. The German DAX index—launched in July 1988 and containing 40 stocks—is very close to its all-time high. Year-to-date, the DAX is up almost 15%, which is in line with the 15.3% gain for the broad European stock market (STOXX Europe 600) and significantly higher than the 3.9% gain for France’s leading index, the CAC 40.

As is the case with many indices, the DAX is capitalization-weighted. This means that stocks that do well continuously gain weight, while weaker ones see their weight reduced. Unlike some indices, the DAX does not cap the weight of individual stocks, and the index is rebalanced every three months.

Table: Stock weights within the DAX Index, total return, and contribution to the index.

Source: Econopolis, iShares BlackRock

The reason behind the strong performance of the DAX is that some of the index's heavyweights (see table) are in great shape. The top five stocks that contributed most to the index's performance are SAP, Allianz, Deutsche Telekom, Munich Re, and Siemens Energy.

SAP is one of the few European behemoths in the tech space. The company develops enterprise software to manage business operations and customer relations. Around 80% of its business is recurring, which means that the company’s results should not suffer much from an economic downturn.

Allianz is a leading European insurer. The company is a hybrid player, meaning that it offers both property insurance and life insurance and savings products. The group has a solid balance sheet and benefits from the benign interest rate and premiums/claims environment.

Siemens Energy is active in renewables—its subsidiary Siemens Gamesa is one of the largest wind turbine manufacturers—but also in the installation and maintenance of fossil-fueled power plants. The recent strong stock price performance is, however, mainly due to the company's exposure to grids. The latter need heavy investments, not least in Germany, which benefits demand for the company's products.

Shares of Deutsche Telekom recently hit a 23-year high. Although the company may be best known for its European activities, the bulk of its revenues stem from U.S. telco operator T-Mobile, which continues to perform strongly.

Munich Re is the largest reinsurer in the world. Through ERGO, it is also a big player in primary health insurance services. The group has a sound track record and boasts a solid balance sheet. Munich Re proved its solidity during the financial crisis.

Looking at the DAX as a proxy for the German economy is, however, wrong. The companies included in the index are all multinationals that derive a significant part of their sales and profits outside of Germany and even Europe. SAP, for instance, derives around 41% of its sales from the Americas, 14% from Asia, and 'only' 45% from EMEA (Europe, the Middle East, and Africa). For Deutsche Telekom, the US is its most important market. In conclusion, we would say, don't get fooled by an index into thinking it represents a perfect picture of a specific economy.