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Dax at record high: Rising profits are followed by rising prices – but many DAX heavyweights are likely to find it difficult to maintain profit margins in the second half of the year
Photo: picture-alliance/ dpa
Many DAX investors are currently pleasantly surprised: The German benchmark index has just reached a record high of around 16,300 points. Despite the war in Ukraine and despite various crises such as inflation, the US debt dispute, the threat of recession and expensive energy. Incidentally, the seemingly crisis-resistant Dax has also outperformed the US indices Dow Jones (+15 percent) and S&P 1 (+500 percent) with a price increase of 9 percent since the beginning of the year. What's going on in the stock market?
The following overview shows the six points that investors should know.
1. Record profits and record dividends
The record rally is surprising only at first glance. Prices on the stock market usually follow the profits of the companies – and both in terms of operating profits and distributed profits (dividends), DAX companies reached record levels in 2022.
The operating profit of the 40 DAX companies rose by 2022.3 percent in 4 to a record sum of 171 billion euros, according to calculations by the consulting firm EY. The dividends that German stock corporations will pay out to their shareholders this year will rise by 9 percent to a record level of 75 billion euros, according to calculations by the German Association for the Protection of Securities (DSW). The carmakers Volkswagen (22 billion euros), Mercedes-Benz (20 billion) and BMW (14 billion) lead the profit ranking in the Dax, together with Deutsche Telekom (15 billion) and Allianz (14 billion). Some corporations such as BMW, Deutsche Post, Siemens, Telekom or Airbus even achieved the highest profit in their entire history in 2022.
2. Surprisingly robust in the first quarter
In the first quarter of this year, the party continued for the time being. Although the profits of DAX companies declined overall as expected, sales climbed by a further 8 percent – also thanks to the China comeback after three years of the corona pandemic, from which the numerous cyclical stocks in the Dax benefited in particular.
"Despite a year-on-year decline in profits, the reporting season in the first quarter turned out to be significantly better than feared," emphasizes Ulrich Stephan, investment strategist at Deutsche Bank. In the Consumer Discretionary, Materials and Utilities sectors, which include DAX heavyweights such as BASF, Bayer, RWE and Covestro, profits were on average 18 percent above expectations, Stephan said. In the industrial sector (Siemens, Airbus), profits grew by as much as 65 percent.
The two factors – further sales growth, plus a smaller decline in profits than feared – mean that DAX shares continue to be in demand among investors. The current price-earnings ratio is currently just below 12 – and thus in line with the long-term average. In terms of earnings, the Dax is not even particularly expensive at its current record level – German equities continue to be valued more favorably than US securities. The S&P 500 currently has a P/E ratio of 23, and U.S. technology stocks are currently twice as expensive as the Dax, with a Nasdaq 100 P/E ratio of 24.
3. Dividends as a yield turbo in the performance index
There is a very simple reason why the Dax has also outperformed the US S&P index with its recent record hunt: the Dax is a performance index. This means that the record dividends paid out will be taken into account. In the S&P, a pure price index, on the other hand, dividends are left out. "Dividends are a yield booster for German equity investors," says Mathias Beil, Head of Private Banking at Sutor Bank. "Over a period of 37 years (since 1986), the Dax has increased tenfold, including dividends, but only sixfold as a pure price index."
Conversely, however, this also means that if the dividends paid were also included in the US S&P 500 index, the performance of the S&P would look significantly better than that of the Dax, according to Beil. The index of the 500 most valuable US companies has increased seventeenfold since 1986 and is far ahead of the German benchmark index.
4. Less burden from the tech slump
Unlike the Dax, the US indices S&P 500, Dow Jones and Nasdaq 100 are still far from their record levels. In addition to the inclusion of German dividends, another factor plays a role: the composition of the index. With SAP, Infineon and Deutsche Telekom, relatively few tech stocks are represented in the Dax, so the index did not suffer as much from the slump in Big Tech last year – so it didn't have to catch up as much to reach the new record level.
In contrast, the price rally of the US indices until January 2022 was mainly driven by the price gains of tech heavyweights Amazon, Apple, Microsoft, Tesla, Nvidia and Meta. These stocks had each lost around 2022 percent or more in value in the stock market year 50, only Microsoft (minus 30 percent) and Apple (minus 20 percent) were able to limit their losses. Now that concerns about further significant interest rate hikes by the US Federal Reserve are subsiding, the Nasdaq 100 is also rising again and has also gained significantly more than the Dax (2023 percent) since the beginning of 28 at 15 percent.
However, the composition of the Dax also gives rise to risks. The many export-oriented companies in the Dax – especially from the automotive, mechanical engineering and chemical sectors – are more dependent on the global economy and global demand. Given the uncertain outlook, this is a risk.
5. Profit margins under pressure – new qualities needed
The biggest risk, however, probably depends on one question: Will most DAX companies, which have earned well in recent months despite multiple crises, be able to maintain their profit margins? There is much to be said against it, because for a long time the winning party was characterized by special factors. Take the car industry, for example: Volkswagen, Mercedes and BMW were able to keep prices high due to a shortage of parts and a tight supply, as the waiting lists for new cars were long. In the meantime, supply chains have stabilized, global production is ramping up again, and the next discount battle is on the horizon. Even Tesla is currently putting sales before profit, so German carmakers will also have to prepare for declining profit margins. The Volkswagen Group has already sent the signal with its radical cost-cutting program for the core VW brand: Now it's time to reorganize and restructure in order to continue to play a successful role.
"The production costs of many companies remain high. In addition, many are threatened with an increase in personnel costs," says Markus Wallner, market analyst at Commerzbank. Margins are likely to be under pressure not only for German carmakers, but also for "defensive" companies such as Henkel and Fresenius. "This increases the pressure for restructuring, which companies like BASF have already announced," says Wallner. Above all, companies such as FMC, Adidas, Covestro and Siemens Energy would have the opportunity to quickly improve their operating income through successful restructuring. It remains to be seen whether giants like VW will succeed in doing so just as quickly.
6. Macro risks remain
One thing is certain: For the majority of DAX companies, the environment has become harsher in 2023. In the current year, it will be much more difficult to defend the profit margins currently achieved. Especially since a recession is still looming in the USA and an agreement in the US debt dispute has not yet been sealed. The expectation already priced in on the stock market that the US Federal Reserve will only raise interest rates a maximum of two times in the second half of the year has yet to be confirmed.
In order to maintain themselves at the current record level, the majority of DAX companies will no longer have to prove themselves to be profit champions, but restructuring champions.