Investing

Dax conversion The future prospects of the MDax are in the dark

The Dax is getting bigger, the MDax is shrinkingimago images / STPP

Deutsche Börse is getting serious: In September of next year, the German leading index Dax will be increased from 30 to 40 values. This not only has consequences for the most famous German stock market barometer, but also for its “little brother”, the MDax. The ten companies that will soon be included in the Dax will be selected from the small cap index – and no other companies will move up for them. While the Dax is growing, the MDax will shrink from 60 today to only 50 in the future.

Investment professionals disagree about what the reform – or rather: the re-form – of the index family means for the MDax and, as a result, also for small cap investors. While some fear that the market barometer could slip into insignificance as a result of the shrinking cure, others see the planned downsizing as a concentration on the essentials.

Marc Decker, head of asset management at the private bank Berenberg, fears “negative cascade effects” for the MDax due to the Dax expansion. This would eventually have to hand over his top companies to the next higher league. “It would be welcome if the current reform were a first step towards a more radical reform,” says Decker. “Anyway, a start has been made.”

Sharper profile?

Decker’s colleague Andreas Strobl, fund manager at Berenberg, sees it the other way round. He is convinced: The bloodletting, which costs the MDax around a third of its market value, will make the index more interesting for investors. In his opinion, this sharpens the profile of the MDax. In the future, the focus will again be more on smaller, high-growth companies, says Strobl – in other words, on those investment candidates that small cap investors find particularly attractive.

It is still uncertain at this point in time which MDax companies will join the Dax next year. Candidates include the fragrance manufacturer Symrise, the online retailer Zalando and the energy supplier Uniper. One thing is clear: shortly before Christmas this year there will be castling in the MDax. However, this has nothing to do with the reform of the “big brother” Dax. As part of the regular adjustments, the financial services provider Grenke will slip from the MDax to the SDax at the end of December. The Siemens spin-off Siemens Energy takes its place. The next regular index review is due at the beginning of March 2021.

Investors could be tempted to bet on the index climbers in the MDax in the hope that their prices will rise before they are included in the most important German stock market index. However, you should resist this temptation, warns Marko Behring, Head of Asset Management at Fürst Fugger Privatbank. The index effect is usually not permanent. “Price increases due to a possible index inclusion are mostly of a short-term nature and often fizzle out soon afterwards,” says Behring.

It can be observed again and again that price rallies among index movers are already over on the day they move up to the next largest stock market barometer. In addition, it would be far too early to bet on the DAX newcomers in the coming year: “There’s still a lot of time until autumn 2021,” says Behring. “Some market capitalizations in the MDax can still rotate a lot.”


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