StockBeat: German DAX Hits All-Time High as Brighter Outlook Lifts Cyclicals

© Reuters.

By Geoffrey Smith 

Investing.com -- It’s been a bright start to the week in Europe, with Germany’s DAX index hitting a new all-time high amid signs of fresh buying of cyclical names as confidence in the arrival of an economic recovery grows.

The development is something of a paradox, as the authorities in Europe’s largest economy continue to act as if the pandemic is about to take a major turn for the worse: federal and state authorities are widely expected to extend the bulk of the country’s lockdown measures for at least another two weeks at a meeting on Thursday. 

The government’s conservative approach, led by Chancellor Angela Merkel with her customary risk-aversion, rests on two main pillars: the slow rollout of vaccinations and the awareness that at least two of the new strains of the Covid-19 virus appear be to more highly transmissible than the original  one. That has reinforced the government’s desire to ensure that infection rates are low enough for the country’s contact tracing system to withstand any relaxation of the guidelines.

But because of its high concentration of exporters, the DAX story is more about the expected global recovery than the German one, or even the European one (markets appear to have priced in the reality that the EU’s poorly executed vaccine procurement will delay the recovery by around three months).

Capital goods providers, in particular, have started to perform as the market anticipates an upturn in corporate investment thanks to expansive fiscal and monetary policy in Europe and the U.S. That’s as true for midcap names as for blue chips: the MDAX midcap index also hit a new record high on Monday morning, rising 0.4% to 32,472 points, with its medical and biotech names prominent among the gainers.

Much can be explained by valuations: analysts at JPMorgan (NYSE:JPM) point out that the DAX is trading at an implied 15.7 times expected 2021 earnings, a clear discount to the 23 multiple of the S&P 500.   

But it also helps that corporate-specific newsflow is also starting to turn positive. Of the two best performers in the DAX over the last week, Bayer (OTC:BAYRY) took another big step toward drawing a line under its disaster with Roundup, the weedkiller developed by its Monsanto (NYSE:MON) unit, while Daimler (OTC:DDAIF) signalled it will split its passenger cars and truck divisions to help unlock value and sharpen the focus of each. 

Daimler stock has risen 14% in the last week, although it paused for breath on Monday on a touch of disappointment after Chief Executive Ola Kallenius said it would need until the end of the decade for its electric vehicles to be as profitable as its internal combustion models.