In early 2020, the DAX 30 Index (DE30) plunged 40% when the pandemic hit. It fell from 13,700 in late February 2020 to an intraday low of 8,255 on 16 March. After bottoming out, the index started grinding higher against a backdrop of ultra-loose monetary policy from the European Central Bank (ECB) and very supportive fiscal policy from the German government. The DAX 30 clawed back that 40% drop throughout the remainder of 2020, kicking off 2021 at its pre-pandemic level of 13,900.
As the COVID-19 vaccination programme picked up pace earlier this year and the economy reopened, the German blue-chip index continued to advance. It’s gained 19% so far in 2021, hitting a fresh all-time high of 16,031 on 9 August. More recently, upward momentum has slowed, with the index hovering around this record level without pushing on to fresh highs.
There are quite a few key events to watch out for over the coming weeks. In this article, we take a look at the upcoming German federal election and how different scenarios could affect the country’s stock market. We also consider the expansion of the DAX index to include 40 companies and what this could mean for investors.
German federal election 2021: what you need to know
After 16 years of rule under Chancellor Angelina Merkel’s Chriatian Democratic Union/Chriatian Social Union (CDU/CSU) party, the country is getting ready for the German federal election of 2021, which will take place on 26 September.
The polls are pointing to a tight race. However, in the latest televised debate, centre-left front runner Olaf Scholze, of the SPD party, was declared a winner, boosting his chances of an outright victory. With less than two weeks to go until voting in Germany, the polls see Merkel’s successor, Armin Laschet, and the CDU party’s popularity crashing to historic lows. Meanwhile, the SPD’s popularity is gaining ground.
That said, coalitions are the norm in Germany, and that doesn’t look set to change anytime soon. According to ING, these elections are not about who is in the lead, but who will lead with whom:
The broad expectation is for a two or three party coalition, with polls indicating one led by the SPD. Any coalition could take several months to negotiate, during which time Angela Merkel will remain Chancellor.
Consequently, while there could be some volatility around the election on 26 September, any long-lasting impact is expected to be quite small, as Adam Patrick Reid, founding partner of Adamis Principle, pointed out in his note to Capital.com:
A left-led coalition could mean that tax rises and minimum wage hikes will be on the agenda. These are not market-friendly measures. However, whether the more liberal policies actually get pushed through will depend on the coalition partners and their priorities. Very liberal policies are unlikely to be agreed on easily, meaning the impact of a SPD-led coalition on the German DAX index is likely to be limited.
According to the polls, a CDU/CSU-led coalition is looking remote, although this would be the markets’ preferred outcome, with tax hikes, labour reforms and other regulation less likely.
In the meantime, Russ Mould, investment director at AJ Bell, suggested that the “general election could cause some near-term volatility, not least because the range of outcomes is so wide”.
Expansion of the DAX 30 into the DAX 40
Prior to the elections, there’s another key event for the nation’s index. The German stock market index is set to see its largest overhaul in over three decades as the DAX 30 will become the DAX 40. The ten new companies joining the index on 20 September are set out in the table below. Meanwhile, existing companies will see their weighting reduced.
The revision was sparked by the collapse of Wirecard AG a year ago, and aims to strengthen the index and make it a truer reflection of corporate Germany. The index has evolved over time from being heavily-weighted towards banks and chemical companies to a wider mix of automobile manufacturers, industrial groups and pharmaceuticals. Interestingly, there is now just one software company on the DAX, SAP (SAP). However, newer innovative companies such as Zalando (ZAL) and HelloFresh (HFG) will broaden the index’s range.
The change from the DAX 30 to 40 isn’t the only shake up for the index. Following the bankruptcy of Wirecard, regulations have tightened around reporting and membership. There is a new profitability requirement: companies must show two years of positive earnings before interest, taxes, depreciation and amortisation (EBITDA). Membership will also be reviewed twice a year, in March and September, rather than once.
These changes in regulation, in addition to the broadening of the index, are likely to be beneficial for the DAX, potentially attracting more international investors and boosting liquidity, a point highlighted by John Woolfitt, director of trading at Atlantic Capital Markets:
Woolfitt added: “The new mix of companies will reflect the Eurozone’s largest economy in a better way. Additionally, the regular review of DAX members is a plus and the more stringent rules mean a repeat of the Wirecard situation is less likely.”
Patrick Reid, from Adamis Principle, thinks changes to the DAX could see volatility ease, which could be a negative for those seeking big swings but a positive long-term result. “In my days of trading Futures, the DAX or Daxcino (as we liked to call it) used to cause stomach gymnastics for even the most hardened trader,” he said.
Companies joining the DAX could see elevated levels of demand, as passive index funds, which replicate the index, will need to buy up these stocks in order to match the new DAX 40. Meanwhile, just being on the index itself will mean that these stocks will get more attention than before.
Russ Mould also commented on the index’s expansion: “Germany’s DAX index has reaffirmed its credentials as a play on global growth over the past year, helped in no small part by the country’s excellence in engineering and exports, and it trades close to all-time highs as a result.”
He added: “Investors in German equities face the same issues as those who are allocating capital to other major market and benchmarks: whether inflation is becoming entrenched or not; whether the central bank (in this case the ECB) will start to taper QE and tighten monetary policy; whether the pandemic can be successfully beaten off; and whether China is on the verge of a slowdown, to the detriment of global trade flows.”
Where next for the DAX: the technical picture
The DAX has continued to be rejected by the 16,000 level, despite several attempts to break through and aim for fresh all-time highs, consolidating around the 15,800 mark for several weeks. After the last week’s sell-off, the index found support on the 100-day simple moving average (SMA) and is attempting to retake the 50-day SMA, a marker which has acted as a key support across most of 2021. A close back above the 50-day SMA means we could see another push higher.
The Relative Strength Index (RSI) has been showing a bearish divergence, suggesting that the move higher is losing momentum.
It would take a move below 15,450, last week’s low, in order for sellers to gain traction and head back towards 15,000, the key psychological level.
Now, let’s take a look at the latest DAX 30 predictions to see where the index could be heading next.
DAX forecast for 2021 and beyond: what to expect and when
Analysts at Deutsche Bank are cautious regarding the outlook for global equity markets. The investment bank’s latest survey of 550 market professionals across the world revealed that 58% expected a correction of between 5% to 10% by the end of the year. Meanwhile, one in ten were bracing for a deeper sell-off. In the case of the DAX, this would equate to a 750-point to 1,500-point loss that would take the index to approximately where it was trading before the pandemic hit.
Binky Chadha, chief strategist at Deutsche Bank, said: “With the current cycle advancing very quickly, the risk that the correction is hard is growing.”
Senior market analyst at City Index, Fiona Cincotta, is also prudent in her forecasts. In an email to Capital.com, she wrote:
"While the DAX’s recovery across this year has been impressive, 16,000 is proving to be a tough nut to crack. Momentum is stalling. Investors want to see how supply chain bottlenecks and COVID developments play out before taking this run higher.”
Cincotta also warned: “For now, the 100 SMA is keeping the price supported, a meaningful break below this level could fuel a more significant correction."
According to macro models and analysts’ forecasts compiled by Trading Economics, the German index could weaken to 15,000 by the start of the fourth quarter. Heading into 2022, the DAX is predicted to decline towards 14,000 by July 2022.
The Economy Forecast Agency also predicts that the DAX could lose ground in the coming quarter, heading into the end of the year at 15,464. It then suggests the index could gain an upward momentum to reach 18,125 by the end of 2022. The DAX is then forecast to hit 20,982 by March 2023, before sliding lower to close September 2023 at 19,915.
When considering analyst commentary or predictions from algorithm-based forecasting services, it’s important to keep in mind that they can get their estimates wrong. You should always do your own research to form a view of the outlook for the index and the relevant market conditions.
Start trading the DAX 30 Index today with Capital.com
You can get broad exposure to the DAX 30 through index tracking funds. The value of your position will rise or fall in line with the movement of the index. It can be virtually impossible for individual investors to replicate the index in this way within their own portfolios.
Another way to trade the DAX 30 Index is with contracts for difference (CFDs) on Capital.com.
CFDs give you the opportunity to try to profit from both positive and negative rate fluctuations. If you expect the index to rise, you can open a long position. If you think it will fall, you can go short.
Germany 30 - DE30 CFD
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Create an account on Capital.com and stay on top of the latest market developments and forecasts to spot the best trading opportunities. Follow our coverage of the DAX 40 news and be among the first to trade CFDs on the expanded index as soon as the changes are in force.
Edited by Valerie Medleva
The DAX 40 stock index will replace the DAX 30 Index. The key DAX 40 date to remember is 20 September 2021 – this is when ten more companies will join the index, making it more representative of the German economy. The expansion could also see volatility in the DAX ease.
Germany will vote on 26 September 2021 in its Federal Government election, the first election without Angela Merkel in 16 years. Currently, the most likely outcome is that two or three parties will form a coalition – and the impact on the DAX is likely to be minimal. It would take an unexpected landslide victory by the far left to send the index sharply lower.
The DAX 30 will expand to become the DAX 40 on 20 September 2021. This will be the biggest shake up at the DAX in its 33 year history. The DAX could better reflect the broader German economy with 40 constituents.