DAX forecast: what impact will adding 10 new companies have?
Germany’s flagship index is rising to 40 firms: what does that mean for the DAX forecast?
Germany‘s flagship DAX Index, also known as the DAX 30, is about to undergo a pretty significant makeover.
On 20 September, 10 new constituents are going to be added, with Deutsche Börse heralding the change as a “significant evolution of the index and of the German capital market”.
This will mean the DAX will now be home to a total of 40 large companies.
All of this has a knock-on effect on the MDAX too, which lists mid-cap constituents that fall outside Germany’s 30 biggest publicly-listed companies. This index will now track 50 businesses rather than 60.
A raft of other changes have been made in recent months. Companies that are candidates to join the DAX now need to have positive earnings before interest, taxes, depreciation and amortisation (EBITDA) in their two latest annual financial statements. Minimum liquidity requirements have also been introduced, and rankings are now based solely on market capitalisation.
Qontigo, the financial technology company formed in 2019 through the merger of the index providers STOXX and DAX and the risk analytics firm Axioma, and part of Deutsche Börse Group, has spearheaded the DAX’s new composition. It has expressed hope that the index will now represent a larger spectrum of the German capital market, all while ensuring that there is greater alignment with international standards.
DAX forecast: who is joining the top tier?
With Germany’s premier index now swelling its ranks by a third, this will inevitably have an impact on the DAX’s price.
Deutsche Börse has also confirmed which 10 companies are going to be joining the new top 40.
Some of the most prominent names include Airbus, which is still battling to recover from the damage wrought by Covid-19. Shares plunged by close to two thirds between January and April 2020 as the full impact of the pandemic became clear, with international travel grinding to a halt as planes were grounded.
Porsche will also be accelerating into the DAX, rubbing shoulders with other carmakers including Continental, Daimler and Volkswagen. The sportswear brand Adidas is going to be given a run for its money with the arrival of Puma, its Bavaria-based rival.
As the index shifts gear from a Germany 30 forecast to a Germany 40 forecast, it is also worth keeping an eye on some of the younger upstarts entering the top-tier index. One of them is HelloFresh, which only completed its initial public offering on the Frankfurt Stock Exchange in November 2017. At the time, the company faced scepticism about its business model and shares were priced at €10.25 each. Little were analysts to know that a pandemic would be around the corner with consumers looking to replicate the restaurant experience at home. As of 10 September, HelloFresh’s shares have risen close to ninefold since their debut. The company now faces a battle to stay relevant as lockdown restrictions ease and the hospitality sector bounces back.
What does this mean for DAX predictions?
The DAX 30’s facelift can partly be attributed to the Wirecard scandal. While a constituent of the index, the electronic payments provider sensationally announced that €1.9bn was missing from its balance sheet. This subsequently led to allegations of accounting regularities, an opaque management structure, and failings among regulators and auditors alike.
Although the addition of 10 companies will help make the DAX more diverse, all while potentially enhancing levels of liquidity and mitigating the impact that a sharp fall in one constituent’s shares has on the DAX’s price, there are concerns that the reforms don’t go far enough.
In a recent article, the Financial Times’ editorial board opined that the eurozone needs a hard-hitting index in the aftermath of Brexit, which has left the City of London to forge its own path. But with the DAX underperforming when compared with European counterparts and with exciting homegrown start-ups, such as BioNTech, opting to list in the US instead, the FT argued that “an opportunity has also been missed to improve governance”.
Stressing that reinvigorating the market requires more than adding 10 extra companies, the FT concluded: “Germany’s version of capitalism is a success story but it is hard now to find a DAX member that is not facing a dramatic transition over the next few years, from Deutsche Bank’s long-running travails to carmakers and energy companies coping with climate change.”
The Frankfurt-headquartered DWS Group, an asset management company that was formerly a part of Deutsche Bank, has adopted a more optimistic view, describing the rejuvenated index as “bigger and relatively better”.
It said that in the current formation of 30 companies, the DAX covers “a smaller-than-average portion of the overall domestic stock market compared with other major international benchmark indices”, covering less than two thirds of the total market cap. However, the change is expected to increase this to 80%, which will rival the much bigger S&P 500.
DWS Group estimates that the change will deliver an additional €350bn in market capitalisation, and says this could entice international investors.
In late August, it also gave a DAX forecast of 16,700 points within 12 months, saying that this would give the blue-chip index a “minimal edge” over the S&P 500, a contrast to the weaker performance traditionally seen in recent years.
The constituents which appear in the DAX are reviewed on a quarterly basis and the index is refreshed every second. The figures you see are based on Xetra, a trading system that monitors share prices in real time.
Constituents in the DAX are weighted based on their market capitalisation. Because of this, sharp moves upwards or downwards among the index’s bigger members can amplify changes in this index. Macroeconomic developments in Germany and the wider eurozone can also have an impact, as well as financial results and news stories pertaining to constituents.