(News Bulletin 247) – The largest index on the Frankfurt Stock Exchange has recorded remarkable progress since the start of the year, while the economic situation in the euro zone’s largest economy appears gloomy. This can be explained by its strong internationalization and the performance of some of its major residents, such as SAP.

It’s hard not to find this start to autumn gloomy for the German economy. The country’s five main economic institutes have been anticipating, since the end of last month, a contraction in gross domestic product of 0.1% this year, after already a decline of 0.3% last year. The OECD is a bit more optimistic (+0.1%). But the observation is the same: once the locomotive of the euro zone, Germany is now lagging behind its neighbors, with the OECD counting on 0.7% for the entire euro zone.

“The German ‘model’ which had achieved so much success in the 2000s and 2010s thanks to integration into global trade is showing its limits. Production costs have risen, notably due to the energy crisis which showed the vulnerability of the chosen mix (excessive exposure to Russian gas. At the same time, China, which was driving demand for manufactured products, has become a first-rate competitor,” explains Oddo BHF.

The latest announcements in Germany from companies illustrate this slump, particularly in the automobile industry. Symbol of German industry par excellence, Volkswagen has indicated that it is considering job cuts or even, in an unprecedented development, the closure of factories across the Rhine. BMW and Mercedes-Benz were forced to lower their financial targets for 2024 (Volkswagen also did so).

>> Access our exclusive graphic analyses, and gain insight into the Trading Portfolio

A nice surprise

And yet the DAX 40, the main index of the Frankfurt Stock Exchange, defies gravity. Setting new records, the index increases by 16.2% over the whole of 2024, while the CAC 40 loses 0.6%. It is important, however, to remember that the CAC 40 prices detach dividends while the DAX 40 assumes that these dividends are reinvested. But even taking the CAC 40 GR (+2.35%), which aligns with the practice of the German index, the gap remains significant.

Certainly, the political turmoil in France linked to the dissolution of the National Assembly in June and the political uncertainties which followed, weigh in the balance. But that doesn’t explain everything. Especially since the FTSE 100 (+6.7%), main index of the London Stock Exchange, and the SMI (+9.4%), that of Zurich, the two other strongholds of Finance in Europe, are also left behind by the DAX 40.

“The strength of the DAX is a positive surprise, as it cannot reflect a zero-growth German economy and painful developments in most of its export markets,” summarizes the independent research firm Alphavalue.

Deutsche Bank also sees the DAX 40 continuing its progression. While it is currently at around 19,460 points, the establishment sees it reaching 21,000 points next year.

How can we explain such a decorrelation between the German economy and the tone of its largest stock market index?

Germany’s Magnificent Seven

Goldman Sachs asked the question in a study published last month. The first element of the answer is not very complex. “The DAX has held up well because it is not really linked to the German economy,” summarizes the American establishment. According to the bank’s data, only 18% of the index companies’ revenues are generated in Germany. For comparison, the CAC 40, although made up of very internationalized companies, displays a higher rate of 22.7% (of revenues generated in France), according to a study by the EY firm.

Beyond this low exposure to Germany, several DAX 40 heavyweights are having a good year. “Specific sector factors may have contributed to its outperformance, given the greater weight of growth stocks,” said Bloomberg in August Aneeka Gupta of Wisdom Tree.

In its September 10 note, Goldman Sachs cited the “Magnificent Seven” of the DAX 40, an obvious reference to the Magnificent Seven of Wall Street (Tesla, Apple, Microsoft, Amazon, Meta, Nvidia, Alphabet).

These seven stocks include the professional software publisher SAP, the insurer Allianz, the reinsurer Muchich Re, the pharmaceutical group Merck, Siemens Energy, specializing in power plants and renewable energies, the industrial conglomerate present in arms Rheinmetall, and the telecoms operator Deutsche Telekom. As of September 10, their average growth stood at 31%, noted Goldman Sachs. For comparison, only three CAC 40 stocks currently approach this performance: Schneider Electric (+36.1%), Safran (+34.45%) and Saint-Gobain (+26.9%).

These seven companies “combine a mix of restructuring histories, pricing power and a concern for shareholder returns (with new share buyback programs),” explains Goldman Sachs.

A “hidden champion”

The bank also mentions “favorable winds” specific to each stock, citing, in the case of Siemens Energy, the electrification of the economy, a megatrend. Siemens Energy has also had a string of good publications (18.5% growth over the last published quarter) and strengthened its balance sheet, by selling assets worth 3 billion euros. “The electricity market remains strong, leading to high volumes and prices in the ‘Grid’ (electricity networks) and ‘Gas’ divisions. At the same time, the recovery of Gamesa (the renewable energy division, editor’s note ) seems to be on the right track,” judges Deutsche Bank. The stock is up more than 220% for 2024.

For its part, Rheinmetall (+70%), which supplies armored vehicles to the German army, continues to be the favorite defense stock of investors in Europe, driven by geopolitical tensions.

It is also difficult not to mention SAP (+58.5%), the largest capitalization on the German Stock Exchange, with 246 billion euros. The company, which again published excellent results on Tuesday, is exposed to two promising themes, namely artificial intelligence (AI) and cloud computing. The company also reorganized itself at the start of the year to focus on the development of AI.

“SAP has established itself as the only proxy for exposure to AI” in Europe, judges Alphavalue. “The conversion of its software to the cloud over the past few years has allowed the company to expand into new markets and do so through a more cost-effective subscription model. We believe that- Beyond the current craze for AI, SAP is perfectly positioned to provide its customers with products that may make less headlines but are just as important to them,” explains the investment company. Walter Scott.

Even apart from the “Magnificent Seven” cited by Goldman Sachs, other groups are showing good progress in the DAX 40. Let us cite Adidas (+17.8%), which is taking on its rival Nike and has raised its prices several times. 2024 objectives, the aeronautical engine manufacturer MTU (+58.3%) which benefits from the dynamics of its after-sales services, or the banks Deutsche Bank (+26.8%) and Commerzbank (+50%). The latter obviously benefited from the rise in its capital of the Italian Unicredit.

Goldman Sachs points out in passing that the valuations of German groups seem particularly attractive given their profit growth prospects. “For us, the German equity market is a bit of a hidden champion,” judges Deutsche Bank.