Happy Birthday DAX!

A financial-market icon is celebrating its thirtieth birthday: since being launched at 1,000 points in 1988, the German Stock Market Index (“DAX“) has been on a continuous upward trajectory – gaining an average of exactly 8.8% per annum.

This performance is all the more noteworthy because many DAX heavyweights have had to contend with considerable problems over the past few years – problems which, in some cases, have far exceeded the normal cyclical fluctuations in the business trend. Some cases in point are the crisis affecting Germany’s two listed banks, especially Deutsche Bank; the realignment of the two utilities as a direct consequence of the 2011 Fukushima catastrophe; and the diesel-software-manipulation scandal at  Volkswagen. The subsequent below-average price performance logged by these former “widow and orphan stocks“  has been more than made up for by disproportionate price gains on other shares contained in the index, the upshot being that the DAX has climbed continuously.

In view of the success stories written by German stocks, we never tire of advocating the view that German investors should channel a proportion of their free assets into equities. In view of the enduring low-interest-rate environment and of longer working lives / longer life expectancies, equity instruments are indispensable in the context of old-age precautionary saving and wealth accumulation. Bonds and other fixed-interest vehicles are no alternative, not least because their rate of interest has been lagging behind the official inflation rate for a long time now, entailing a creeping erosion of the real value of savings.

If, following the principle of diversification, the shares of a whole range of good companies from various sectors are purchased at a fair price (they do not always need to be trading on a deep discount to fair-price metrics) and held for a long period of time, equities frequently turn out, on average, to be high-yielding investments.  What is important in this connection is to block out those short-term price fluctuations which have nothing to do with the company’s underlying value growth. As long as there is progress and competition without serious military altercations, it is an iron law that economies grow. The longer the time horizon of an equity investment, the more equity returns will converge with the returns from the underlying corporate business. Under such a scenario, the price at which an investor enters the market becomes secondary; it is more important that the compound-interest effect is not interrupted.

Even though the most recent recession in the real economy already lies a decade in the past, no overshoots in the form of a broad bubble or “sucker’s rally“ are currently detectable. On the contrary, German investors are undershooting in the sense that they seem to find it just as difficult as before to shift capital into shares even when the DAX’s PE ratio is standing at 12.2 (this corresponds to an earnings yield of very nearly 8 percent). A fit of broad market euphoria is a very different phenomenon. This is good news for investors who have remained loyal to the DAX.


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