How the Dax hides virus worries

E.It is soon possible that there will be more than 10,000 cases of infection per day, said Lothar Wieler, President of the Robert Koch Institute, on Thursday in Berlin. Within a day, the number of new infections rose from around 3,000 to 4,000. While on the one hand fear of a second lockdown is growing, on the other hand the German stock index Dax has jumped the 13,000 point mark. And even in the course of trading, the index was unimpressed by the new figures and even rose slightly. There is no trace of virus worries on the domestic stock market. But how does that actually fit together? After all, the Dax has been able to make up almost all of its losses since the low in mid-March, with the most important German stock index rising more than 50 percent since then.

The fact that the Dax is currently performing so well has to do with the cyclical basic orientation of the German share index, says Marc Decker of the private bank Merck Finck and explains that the index is a reflection of German industry with a focus on the export economy. This basic configuration supports the index, as cyclical stocks were recently sought due to the improved economic outlook.

Company headquarters not so important

It’s about where the company’s customers are – and not where the company’s headquarters are, says Thomas Lehr, capital market strategist at Flossbach von Storch. What is important is how the pandemic will affect companies’ long-term sales and profit expectations. Many German companies benefit from the fact that China, for example, did so well in the Corona crisis, said Lehr. Many cyclical values ​​could be found in the Dax, which did badly in a weak economy. But there are also many “noble cyclicals”, emphasizes Lehr. These values ​​are in demand internationally and are not only dependent on the domestic economy. How the Chinese economy is doing is more important for the Dax than a curfew in Berlin.

With a view to shares of an internationally oriented and highly diversified Swiss food company, so Lehr, it quickly becomes clear that the medium to long-term perspective of a company that sells food worldwide and is based in Switzerland is not related to the current infection rate there. You can also see this in America: There shares in American software companies with a high weight in the index are doing very well, although America has been hit much harder by the pandemic.

Lots of liquidity in the market

The currently “friendly” markets are also based on the extremely extensive support measures of the central banks and the aid packages that have already been put together and promised, says Decker of Merck Finck. Worldwide there is a lot of liquidity in the market that is looking for investment opportunities. In the current low interest rate environment, there are hardly any alternatives to the stock markets for investors. In addition, macroeconomic figures signaled that things were going better overall than initially feared, according to Decker. Positive reports on progress in vaccine development also contribute to this. All of this supports the risk markets, according to Decker.

The markets are currently largely praising a comprehensive recovery, says Christian von Engelbrechten, Fidelity fund manager. “I am not entirely convinced of the economic situation,” he adds. You can already see that the recovery trend is already slowing down in some areas, according to the fund manager.

The prices of many companies in Germany are higher today than they were a year ago, says von Engelbrechten. The question arises as to whether the prospects for them are really better today than they were twelve months ago. In some areas of the market, however, the fund manager cautions that the risks are increasingly being hidden.

The economic data was decoupled from the infection process, says Pictet chief strategist Luca Paolini – not only in Germany. This is also due to the fact that the death rate is falling and the virus is perceived as less deadly. Consumption is currently robust. However, if the mortality rate rises and there is a nationwide lockdown again, the Dax will come under enormous pressure, says Paoloni.

The stock exchange trades the future

If you wonder why the real economy and the infection rate on the one hand and the share prices on the other hand do not match, says Thomas Lehr, assume that the price must reflect the “here and now” of the real economy. The future earnings of companies for the next few years would be traded on the stock exchange. Investors look much further ahead and include long-term interest rates in their considerations. And that, says Lehr, is probably the most relevant consequence of the pandemic for investors.

The stock exchanges trade the future and not the present, says Merck-Finck expert Decker. It must therefore be stated that markets can run well for a long time despite bad news. Often all that is needed is a new trigger or a suddenly changed market view of things to initiate a sale.

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