The DAX 40 Index (DE40) is set to lose ground in September after rallying for seven straight months in 2021. Is this a natural correction or the start of something more sinister?
In this article, we recap the latest market-moving news and check out analysts’ predictions for the blue-chip index.
How has the DAX moved so far in 2021?
The DAX 40 dropped steeply as the pandemic took hold last year. The German index slumped nearly 40% to hit a low of 8,257 mid-March, a level last seen in 2013.
It then rebounded off the seven-year low and steadily clawed its way higher, starting 2021 at the pre-pandemic level of 13,890, extending gains as the Covid-19 vaccination programme picked up pace and the economy reopened. The index reached an all-time intraday high of 16,030 on 13 August.
The DAX 40 hovered around this level throughout the rest of August before trending lower in September. At the time of writing (29 September), the index was hovering around 15,404, 3.5% down since the start of the month as investors contend with changes both in the index and Germany’s political landscape.
Expansion of the DAX 30 into the DAX 40
On 20 September, the DAX 30 Index underwent the largest overhaul in its 33-year history, welcoming new constituents. The ten new DAX 40 companies are:
The revision was sparked by the collapse of Wirecard AG a year ago, and aims to reflect the broader economy. The move should make the DAX less prone to the influence of individual components.
Slowly, the DAX has evolved from an index heavily weighted towards banks and chemical companies to a broader mix of automobile manufacturers, pharmaceutical and industrial groups. The index, however, remains notably short of technology firms.
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.
So, what do these changes mean for the index?
There are several positives which are likely to evolve from the changes, as John Woolfitt Director of Trading from Atlantic Capital Markets highlighted in an email to Capital.com:
Patrick Reid, from Adamis Principle, thinks changes to the DAX could see volatility ease, which might 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, investment director at AJ Bell, 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.”
German elections lift the DAX 40
In addition to changes to the index and regulation, DAX traders have also been watching the political landscape change in Germany, with the first election in 16 years without Angela Merkel.
As the polls predicted, the Social Democratic Party (SPD) led by Olaf Scholz won the most votes in the German election of 2021 on 26 September.
The 2021 German Federal election results revealed that the SPD won 25.7% of the votes, while the CDU/CSU came a close second with 24.1%. This marked the worst performance by the Conservatives in recent history.
The smaller parties, the Green party and the FDP, won 14.8% and 11.5%, respectively, making it a successful night for the minorities.
With no single party winning a majority of the seats in the Bundestag, the result has paved the way for coalition talks. As analysts at ING explain, the party with the most votes doesn’t necessarily lead the next government:
There are several outcomes which could result from coalition talks. Scholz has appealed to the Greens and the pro-businessines FDP to back a three way coalition. On account of the parties’ signature colours, this is the so-called traffic light coalition.
The CDU leader is, so far, refusing to give in and has said that he will also attempt to form a government with the FDP and the Greens. By the same token, this has been dubbed the Jamaican coalition.
Coalition negotiations can be lengthy. Back in 2017 they dragged on for six months. Investors will be hoping that this won’t be repeated given the challenges that face the country as it emerges from the pandemic, amid supply chain disruptions and a looming energy crisis.
Drawn out negotiations could be a damper for the German economy and the DAX. Bloomberg analyst Björn van Roye said:
So far, the DAX has responded positively to the German election results, opening on Monday in the black and holding onto gains to close 0.27% higher. Principally, the index saw a relief rally as the result ruled out a hard left coalition, the least market-friendly option. Furthermore, the prospect of a three-way coalition prevents market unfriendly scenarios, and the prospect of the business friendly FDP being included in the ruling coalition is also keeping the DAX buoyant.
Greg Fuzesi, an analyst at JP Morgan, also noted that the results point to a continuation of the status quo:
DAX 40 outlook: the technical picture
The index refreshed its all-time high just above 16,000 at the end of August before trending lower and falling through its 50-day simple moving average (SMA) to a low of 15,020, just above the 200-day SMA.
After rebounding off 15,020, the rally has run into resistance at the falling trendline dating back to late August and the 50-day SMA.
In the meantime, the Relative Strength Index (RSI) is neutral. However, failure to retake the 50-day SMA combined with a shooting star candlestick (a reversal signal candle) are keeping the sellers hopeful.
Support can be seen at 15,430, a level which offered support on 17 September as well as in late July. A break below this level could open the door to 15,000, the key psychological level and the 200-day SMA.
Any extension of the recovery would need to retake the 50-day SMA at 15,694 and the falling trendline at 15,575 to expose last week’s high at 15,800. A break above this level could see the buyers gain traction towards 16,000 and fresh all-time highs.
DAX 40 forecast: where do analysts see the index heading to in 2021 and beyond?
Amundi Asset Management’s Thomas Kruse and Tristan Perrier are upbeat regarding the outlook for German stocks, particularly those focused on becoming carbon neutral given the shift that is expected should the greens enter into a governing coalition:
They added: “More generally, sectors such as green energy and automotive might be attractive, given the focus on the transition towards e-mobility.”
JPMorgan Chase’s strategists led by Mislav Matejka see winners and losers from an expected greener focus to German politics, writing in a note:
The analysts added: “On the other hand, higher CO2 emitters, such as airlines, transport, steel, construction, could see headwinds.”
More broadly, investment banks and other market players have warned of a correction in global equities. James Congdon, co-head of Canaccord Genuity’s research division Quest, suggested that “global stock markets may be entering a period of turmoil”.
However, Peter Oppenhieimer, chief global equity strategist at Goldman Sachs, believes that a 10% correction could provide an opportunity to buy back into stocks. His comments came following a steep sell-off in the markets last week. Oppenhieimer considers that, fundamentally, we are still in the cycle’s early stages.
In the meantime, City Index’s senior market analyst Fiona Concotta said in her Germany 40 forecast that more gains are needed for the index to re-enter a bullish trend:
According to Trading Economics, the index could decline to 15,000 early in the fourth quarter. Heading into 2022, the DAX is forecast to extend losses towards 14,000 by July next year.
The Economy Forecast Agency also predicts that Germany’s main index could weaken in the coming quarter, closing 2021 at 14,955. However, its longer-term DAX 40 prediction suggests that the index could rise to 17,527 by the end of 2022 and 19,258 by the end of September 2023.
When considering analyst commentary and 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.
The index closed 0.27% higher on 27 September, a day after the German election. The stronger close came as a three-party coalition is the most likely outcome, which should prevent market-unfriendly policies. Furthermore, the pro-business FDP is expected to be included in the governing coalition, offering additional support the the DAX
The DAX 40 is the German stock market index made up of the nation’s 40 major blue-chip companies listed on the Frankfurt Stock Exchange. The index recently expanded from 30 stocks to 40 to offer a truer reflection of corporate Germany.
The best time to trade the index is often within the first few hours of trade when economic data from Germany is released. This is often when there is more volatility in the DAX’s performance, potentially providing more trading opportunities.
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.