German equities declined swiftly in recent weeks due to the slowing economic growth in China.However some of the concerns regarding China’s impact on German firms may be over-estimated by investors.

From an article in the WSJ last month:

The DAX has had a wild ride this year. It was up 26.2% by April 10, but by Monday’s close the index had given up all its gains and more, falling into the red. Even after Tuesday’s rally, spurred on by a Chinese rate cut, it was lagging many European peers on a year-to-date basis, up 3.2%.

Germany’s economy expanded 0.3% in the first quarter from a quarter earlier and 0.4% in the second. The apparent inability of the economy to accelerate much could be cause for concern in an environment of weaker global growth, particularly given Germany’s export franchise. But there are reasons to believe that Germany can rely on domestic support.

True, in the second quarter, German exports provided the biggest growth impetus, figures published Tuesday show. And in 2014, China was Germany’s fourth-biggest export market, accounting for EUR74.5 billion of German exports. That is equivalent to 6.6% of total exports, or 2.6% of German gross domestic product.

But the rest of the eurozone, U.S. and U.K., where growth has picked up, account for 52.6% of exports. While some 25% of exports do go to emerging markets, according to Berenberg, slower growth in these nations isn’t a new phenomenon, even if markets are only now panicking about it; Germany has kept its head above water. Eastern European countries, like Poland, Hungary and the Czech Republic, where Germany has major export exposures, are proving resilient.

Source: Germany’s Fate Doesn’t Depend on China, WSJ

The following chart shows the major trading partners in 2014:

Click to enlarge

Source; De Statis

Though China is the 4th largest export market for Germany, it is the 2nd top source of imports for Germany.

For investors looking to gain exposure to German equities, one way is to invest in the largest firms. In order to identify such companies I referred to the Financial Times FT Global 500 2015 list. The German firms appearing the list are shown below: 

Investors with a long-term horizon can consider adding stocks such as Fresenius Medical Care AG & Co.(FMS), Allianz(AZSEY), Continental(CTTAY) and Henkel (HENKY) in a phased manner.

Disclosure: Long E.ON

Germany’s benchmark DAX Index has been swinging wildly in the past few weeks like an emerging market index such as the Bovespa or Sensex. I haven’t seen DAX so volatile in the past. However times have changed. The DAX has become highly volatile among major global developed indices since China’s economy is in a slowdown and many of the DAX constituents generate a substantial portion of their revenue from the communist country.

The DAX is up by 2.4% year-to-date. Currently it is at 10,038. In the past few 52-week it reached as high as 12374. From being one of the best performers this year the index has given up most of the gains and is up marginally now.

The DAX 1-year return chart is shown below:

Click to enlarge

The DAX long-term return chart is shown below:

Source: ComDirect

Though the short-term chart shows high volatility in the long-term DAX has grown nicely.

Here are a few interesting facts about DAX:

1. The Base Date for DAX is 30 December 1987 and the base level is 1,000 points.
2. The index represents the largest blue-chip German firms.
3. DAX is weighted by market capitalization, i.e. the weighting of a single stock relates to its share in the overall capitalization of the stocks contained in the index. The return reported is the total-return which means it includes price appreciation and dividends. This is a BIG difference between DAX and other indices such as the S&P 500, FTSE 100, CAC-40, etc. which do not include dividends in their calculations.
4. The components of the DAX has changed over the years as a reflection of the development of major German companies in the economy. When it was launched in 1988, the original constituents were: Allianz, BASF, Bayer, Bayerische Hypotheken- und Wechselbank, Bayerische Vereinsbank, BMW, Commerzbank, Continental, Daimler-Benz, Degussa, Deutsche Bank, Deutsche Babcock, Deutsche Lufthansa, Dresdner Bank, Feldmühle Nobel, Henkel, Hoechst, Karstadt, Kaufhof, Linde, MAN, Mannesmann, Nixdorf, RWE, Schering, Siemens, Thyssen, Veba, Viag, Volkswagen.
5. Today’s DAX does not include firms like MAN, Mannesmann, Veba, Viag, etc. due to mergers, takeovers, bankruptcies, etc. The current components of the index can be found here.
6. Reflecting the composition of the German economy, the top sectors represented in the index are Chemicals, Automobiles & Parts, Industrials and Pharma & Healthcare.

Source: 25 YEARS OF THE DAX® – THE FACTS, Deutsche Boerse

Related ETF:

• iShares MSCI Germany (EWG)

Disclosure: No Positions