Will Germany’s DAX Outperform Other Developed World Indices This Year?

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The DAX Index of Germany was one of the worst performers in 2018 with a loss of over 18%. As the Germany cooled and global trade war fear escalated the DAX plunged heavily. The German GDP in was just 1.5% last year relative to 2.2% in 2017.

Unlike the consumption-based US economy, Germany is an export-oriented economy. So German firms are impacted more when the global economy is volatile and countries such as China start reducing their imports. More specifically, most of the components in the DAX are global exporters and depend on other countries for their revenue than the domestic economy.

Relative to the poor performance last year , the DAX index has shot up nicely this year with a rise of 6.1% so far those year. Yesterday it rose 2.63% as news emerged about a possible resolution to the US-China trade fight.

I came across a short piece on DAX index performance in MoneyWeek recently. The following is an excerpt from that piece:

Meanwhile, the eurozone as a whole is slowing too while the sugar rush from the Trump administration’s tax cuts has worn off, says David Smith in The Times.

No wonder the latest Bank of America Merrill Lynch survey of global fund managers showed 60% expect weaker global growth this year – the highest proportion since 2008.

Still, as The Economist notes, there is a more optimistic scenario. The discussions between the US and China could disperse the “trade war clouds”. Furthermore, “tax cuts and looser monetary policy in China could stimulate spending in the private sector”. This would bolster other Asian economies, and increase demand for European exports once again, which would “buck up activity in the eurozone”.

What’s more, European stocks are “cheap”, following the latest market slide, according to Jens Ehrhardt of DJE Kapital in Wirtschaftswoche, while Austria Boersenbrief points out the DAX companies remain on track to pay out a record sum in dividends in 2019. So the index could mount a strong recovery. There is a chance that in stark contrast to last year, it could be one of the year’s best-performing stockmarkets in 2019.

Source:Will the DAX dive further in 2019? by marina Gerner, MoneyWeek

Two key points to remember about the DAX Index:

1.The DAX index is a total return index – meaning dividends are included in its calculation. So a higher dividend payout should boost DAX returns further.

2.The CAPE ratio for Germany at the end of 2018 was 16.4 compared to 26.8% for the US. So the German market is cheaper. In addition, the Dividend Yield for German stocks were 3.2% relative 2.1% for US stocks (Data Source: Star Capital).

Note: Dividend withholding taxes for US residents would reduce that 3.2% yield.

Since Germany is the economic powerhouse and is one of the largest economies of the world, it worth watching how German equities perform this year. It might be possible Germany may be a winner this year. Considering German stocks have had a strong start they may be able to maintain that momentum and outperform other developed markets this year.

Related ETF:

  • iShares MSCI Germany Index Fund (EWG)

Earlier:

Disclosure: No positions

Machine Trading Causes Extreme Volatility in Equity Markets

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Volatility in the U.S. equity markets late last year especially in December around Christmas time was extreme to say the least. Instead of a Santa Claus rally, investors were given a lump of coal with markets taking them on a stomach-churning ride. With stocks entering the bear market territory pundits and media alike listed all kinds of reasons why the bear was wildly active. Some of the factors mentioned include:

  • US government shutdown
  • Political paralysis in the US
  • The Federal Reserve raising interest rates
  • US-China Trade War
  • The Bumbling British and their Brexit Drama
  • Peak Bull Market
  • Oil Price Collapse
  • Trump trashes Fed Chairman Powell
  • Global Growth Worries
  • Trump and his plan to build “The Great Wall of America” (preferably to be made of steel or concrete but not of clay or see-thru shower door glass)
  • Stocks are way over-valued especially the over-hyped FAANGs
  • The Treasury Secretary spoke to top bank CEOs about the market situation (who knows why he did that. Maybe he got bored sitting on the beach all-day in Cabo San Lucas, Mexico and just wanted to be a hero that saved the US and possibly the whole world from total collapse just like any other real American guy dreams of)
  • …..
  • and so on.

Below are some of the headlines from the month of December:

Below is an excerpt from the above CNN piece:

The economy is strong and the jobless rate at the lowest in a generation. So what’s wrong?
The view among investors is 2018 was a year of peak earnings and growth that can’t last. The sugar rush of the corporate tax cuts will fade. The trade war with China is raising costs for business. And most importantly, interest rates are rising. The Fed is widely expected to raise interest rates for a fourth time this year to keep a strong US economy from overheating.
Remember, interest rates after the financial crisis a decade ago were kept at near zero to resuscitate the economy. Now that the economy is healed and strong, the Fed is raising rates back to a more neutral policy. Raising them too much or too quickly could thwart the expansion.
At the same time, signs of slowing growth are popping up from China to Germany.
“There’s a fear of weaker economic growth virtually everywhere, as the world emerges from quantitative easing and confronts tighter monetary policy,” says Greg Valliere, political economist at Horizon Investments. “That, in a nutshell, is the greatest concern.”
One key factor that is missing in all the above listed and other articles is the rising role computers play in algorithmic trading in the US markets. Machines are driving the directions of markets more than human traders nowadays. Unlike humans, machines and the algorithms that powers them cannot think. So after a big decline caused by machine trading, humans such as journalists, market experts and others start pontificating reasons that fit the story. Here is an example of this scenario: Stocks plunged yesterday because US-China trade war is worsening and nobody knows what will happen next. If stocks the next day, then these experts conveniently forget the trade war and state the cause for the market rise was falling oil prices.
I came across an interesting article at McLean & Partners on the growing influence of machine trading in equity markets. From the article:

As we reflect on 2018 market performance, it is very clear that volatility returned with a vengeance. While this volatility was triggered by fundamental economic factors like rising US interest rates, global trade disputes, and concerns of a US recession in 2019, we believe that market volatility is and will continue to be greatly enhanced by the rise of machines that are conducting a good portion of the daily trading on global markets. By the “rise of the machines”, we are referring to the world of quantitative computer trading and a specific trading system within this domain called “algo-trading”.

What is Algo-trading?

Algo-trading is the process of using super computers programmed to follow a defined set of instructions (an algorithm) for placing a trade in order to generate profits. Algo-trading has disrupted the structure of the market and now makes up a significant amount of the daily trading volume on US and Global Exchanges (Figure 1).

Figure 1: The market share of algorithmic trading has grown across asset classes and regions.

 

Source: Aite Group, Goldman Sachs Global Investment Research

Should investors shift money away from human investment teams to machine teams?

Although our research team is in favour of utilizing computing power and formulas for screening in the initial stages of our investment process, we firmly believe in the benefits of having a human team researching and carrying out investment decisions. Algo-trading strategies utilizing super computers process immense amounts of data, unearth patterns, and follow rules-based trading strategies with little regard to WHY markets are moving, only that they ARE moving.

Take this past Christmas as an example. The US stock market experienced the largest percentage loss ever recorded on Christmas Eve (down 2.7%) – only to experience the largest one-day percentage gain (5%) since March 23, 2009 on Boxing Day. Did economic conditions change that much between Christmas Eve and Boxing Day?

As fundamental (human) investors, we’re able to conduct deep analysis to uncover the WHY and take advantage of market volatility especially when there is a large gap between the current stock price and the underlying intrinsic value of the business. Sometimes we may be early in our investment decision or wrong, however we will utilize our research process as a guide to navigate these situations as they arise.

Source: The Rise of the Machines, McLean & Partners

So the key point to remember is volatility and more specifically violent movements in US markets are now a feature in the system and not an exception. Accordingly investors should not panic when markets decline sharply and maintain their patience and avoid making rash decision. More importantly they should also ignore all the noises emanated by the media.

The Periodic Table of Commodity Returns 2009 Thru 2018

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The Periodic Table of Commodity Returns is published every year by U.S. Global Investors. While The Callan Periodic Table of Investment Returns shows the returns for various asset classes this table is specific to review the returns of commodities. The latest edition of commodities returns table including the returns for 2018 is shown in the chart below:

Click to enlarge

Source: U.S. Global Investors

The surprising winner among the major commodities last year was Palladium with a return of  over 18%. Gold ended the year with a loss of about 2%.

The worst performer was crude oil as it plunged dramatically late in the year. Oil is an extremely volatile commodity as I have written in this blog before. So no one should be shocked by extreme volatility of this very important global commodity. In 2014, oil declined by over 45%.