Prospects for the DAX remain favourable

Summary

“With a PER 2019e of 11.8 and a dividend yield of 3.5% the DAX is favourably valued.”
“The strong global economy (+3.9% in 2018) will emphatically boost the profits of DAX companies in 2018-9. At the same time, low capital market returns mean there is no real alternative on offer for investors.”
“We find this set-up convincing: We expect that the DAX will have risen a good 13% by year-end to 14,000 points.”

German industry’s order books are filled to bursting thanks to the growing global economy; business sentiment is better than ever before. This is reflected in DAX-listed corporations’ expectations for sales and profit trends. Analysts expect that this year and next year DAX profits should surge 10% in each case. Stock market analysts often tend initially to paint too rosy a picture of profits, with the first estimate therefore being overly optimistic, which then requires a revision downward. However, if one considers the overall (macro-) economic global setting, which is characterized by an economy that is running smoothly, extremely friendly policies on the part of the central banks, and political calm, then in our opinion this time there are good chances that in 2018 and 2019 corporate profits will in fact expand at the pace expected.

If profits do indeed rise over the next two years by a cumulative 20%, then the DAX could climb from its present level up to just short of 15,000 points by early 2020, without the valuation expanding on the basis of the price-earnings ratio (PER). If the DAX PER were then to return to the average valuation level of the last ten years (around 13 PER points), it is quite conceivable that in two years’ time the DAX could top 16,000 points.

We believe that there is a high probability that the DAX will continue to climb in this direction. Alongside the favourable economic trend, the central banks are supporting the positive background conditions for dividend-bearing securities, both at the corporate end (favourable loans) and at the investor end (no alternative investments). Despite good fundamental data, however, it is to be expected that going forward stock market price volatility will increase compared to the prior year, amongst others because the market players will repeatedly cast the prevailing opinion into doubt.

The market consolidation in early February provided the first (minor) stress test, with prices first falling and then concerns about rising US inflation being made responsible for the drop. However, there are no grounds for predicting a crash.

In the next stages along the path we expect the DAX first to rise by mid-year to 13,800 points, and then to continue moving upwards to reach 14,000 points by year-end 2018, which is at present our longest forecast horizon.

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