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DAX forecast for 2020 and beyond

By Amanda Cooper

In 2019, Germany’s blue-chip stock index is on course for its strongest year of percentage gains in six years, but will next year boast such handsome returns? Here is our DAX forecast for 2020

With the trade war still rumbling on between Germany's two largest customers, we look at what 2020 may bring for the DAX index. Read our DAX index forecast here.

DAX analysis: Germany’s biggest and best

Nothing says “Welcome to Deutschland Inc” quite like the DAX, which boasts three of Europe’s top 10 companies as components. The index includes the shares of the 30 largest companies listed on the Frankfurt Stock Index – many of which, arguably, are world leaders in their respective sectors, such as Siemens, Volkswagen, SAP or Bayer.

The index is Europe’s third-largest by market capitalisation, at an approximate $1.09trn, behind London’s FTSE 100, at roughly $2.4trn, and France’s CAC-40, at around $1.45trn. Given that a number of the companies in the index are big exporters, the DAX can act as a bellwether of global trade and not just the health of the underlying German economy.

So what are the DAX predictions for 2020?

Things are certainly looking rosy. The DAX is on course for a gain of 25 per cent in 2019, making this its strongest year since 2013’s 25.48 per cent increase. Global equities have, in many cases, hit record highs this year, driven by investors who, after years of low, or even negative, interest rates have funnelled record amounts of cash into the stock market.

Equity investors have had a winning year, in spite of evidence of slowing global growth, and concern of recession, fuelled by the near two-year-old tariff war between the United States and China.

Germany is the powerhouse of the European economy and the trade war has taken a heavy toll over the past 19 months, since Washington and Beijing began their tit-for-tat impositions of tariffs on each other’s goods and services.

The US and Chinese governments on December 16 announced a tentative “phase one” deal, aimed at resolving the dispute, in which US President Donald Trump has accused Beijing of intentionally weakening its currency to encourage consumption of its goods and flooding the US market with cheap imports of anything from steel to solar panels. These are allegations that China has strenuously denied.

The two sides said they had reached an agreement to cancel another round of tariffs. The specifics of the deal still aren’t entirely clear, but the agreement will apparently lower some US tariffs on Chinese goods and, in turn, will increase Chinese purchases of US agricultural and manufactured goods, as well as some energy products. So what effect does this have on DAX predictions for 2020?

If China sneezes, does the DAX catch a cold?

While many of its components are German flagships in their own right, the DAX is more of a global index, particularly given its components’ sensitivity to fluctuations in world trade, than a gauge of the German economy itself.

Indeed, on the surface, looking at the performance of the DAX this year, few would infer that Germany narrowly avoided technical recession between July and September. Manufacturing sector activity has contracted 11 months in a row this year and the US/China trade dispute along with uncertainty surrounding the departure of the United Kingdom from the European Union have been major factors in the slowdown.

China is Germany’s third-largest foreign business partner and accounts for 7.2 per cent of the country’s total exports, according to the United Nations COMTRADE database. This compares with 8.7 per cent to its top consumer, the United States.

China is the world’s second-largest economy, after the US, and this year looks set to clock its weakest pace of growth since 1992, in part as a result of the trade war but also as a consequence of slower global growth.

As a result, fewer than a third of German companies operating in China expect to meet or exceed their business targets this year, according to a recent survey by consultant KPMG.

DAX index prediction: vorsprung dürch technicals?

From a technical perspective, the DAX certainly looks set to make new highs. The index is just 2 per cent away from January 2018’s record high of 13,596.89, having received an additional boost after breaking above the 78.6 per cent Fibonacci retracement from the decline from the January peak to December 2018’s two-year lows.

With the gap lower in late November, the DAX is trading very much in neutral territory. The relative strength index, which measures how overbought or oversold an asset is, is holding around a steady 50.

Also potentially bullish is the convergence of the 50- and 100-day moving averages on the weekly chart, at around 12,125. The weekly chart shows the 50-day SMA hasn’t traded above the 100-day in over a year, which in turn may give the bulls more of an excuse to push the market up as we head into the year-end.

According to DailyFX analyst Paul Robinson, even a retreat below 13,000 wouldn’t undermine the otherwise bullish outlook, unless it were done “with a lot of momentum”.

“Betting against the market at this juncture doesn’t hold great appeal from a risk/reward perspective” Robinson says.

The index has had an almost unbroken run of higher lows and higher highs over the course of 2019 and, indeed, if the US/China trade war has reached a ceasefire, this may open up the way for more gains. A recent Reuters poll of hedge fund managers showed that the DAX is expected to reach a record by the end of next year.

TradingEconomics estimates the DAX will ease over the coming year to around 12,579.82, in line with a broader-based decline in equity markets in 2020, which, according to the Organisation for Economic Cooperation and Development, will bring with it the slowest pace of global economic growth since the financial crisis a decade ago.

DAX Index forecast: all that glitters is German

While German engineering, technology, medicine and the auto sector might be, for many, the gold standard that is worth hanging on to no matter how gloomy things might get from a macro-economic perspective, is it worth the money?

Over the past year, the DAX has delivered more than decent returns, at around 22.6 per cent. But this looks a little tame compared with the slightly broader eurozone Stoxx 50 index, with returns of 27 per cent over the past year, or France’s rival CAC-40, which has returned 28.78 per cent.

In terms of value for money, the DAX looks a little pricey compared with some of its regional rivals. Based on price-to-earnings – a ratio that measures a company’s current share price to its earnings – investors are betting heavily on an improvement in earnings. A higher PE suggests share prices are rising faster than earnings, as investors look to buy stock in a particular company before it potentially becomes even more expensive.

The DAX has a PE ratio of 24.45, based on Bloomberg data. This compares with just 18.23 for the FTSE 100, another predominantly “global” index, with 20.2 for the Stoxx50. Even the S&P 500, which has hit record high after record high this year, is commanding a PE ratio of just 20.2, with one-year returns of nearly 27 per cent.

DAX price prediction: Ja oder nein? Yes or no?

With the suspension in hostilities between the US and China, and some of the unknowns around Brexit seem possibly to be lessening, Germany and the DAX appear to be well positioned for further improvement. The DAX has offered solid returns and notched up a decent performance in 2019, in spite of a difficult macro-economic and geopolitical backdrop.

Technically and fundamentally, more gains may be forthcoming, yet analysts and economists alike agree that there is still a lot of work to do to shore up the struggling manufacturing sector. Any setbacks in US/China trade negotiations might be harmful to the export-sensitive DAX.

Carsten Brzeski, ING chief Germany economist, sees near-term positives and longer-term negatives. “The short-term prospects for the German economy aren't that bad. With a bit of global tailwind and political will to engage in more investments, a rebound in 2020 is on the cards,” he said in a recent research note.

“It is rather the longer-term prospects of the economy which are worrisome. While growth in the past decade looked effortless, leading to a golden decade, without reforms and investments, the next 10 years could easily end as a lost decade,” he said.

FURTHER READING: Germany avoids recession with modest return to growth

FURTHER READING: World economy to suffer worst growth since financial crisis

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