Germany's economic sentiment rises more than expected during March, defying the country's 'sick man' label. Yet risks persist.
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Latest economic sentiment indicators observed in Germany indicate a robust recovery from the negative levels of 2023, defying the prevailing notion that Europe's largest economy has become the "sick man" of Europe.
In March 2024, the ZEW Indicator of Economic Sentiment for Germany continues its upward trend for an eighth consecutive month, reaching +31.7, its highest level since February 2022 and surpassing market forecasts of +20.5.
According to Professor Achim Wambach, President of ZEW, economic expectations for Germany are experiencing significant improvement. Additionally, more than 80% of respondents anticipate a potential interest rate cut by the ECB within the next six months.
This expectation explains the more positive outlook for the German construction industry. Furthermore, the German export sector stands to benefit from heightened economic hopes for China and the projected weakening of the dollar against the euro.
However, the assessment of the current economic situation remains at a notably low level. This aspect somewhat mitigates the overall increase in economic expectations.
Could German stocks extend their gains further?
The DAX index, which serves as a barometer for the German stock market, is currently trading at record highs, marking an impressive streak of seven consecutive weeks and five straight months of gains.
Since hitting relative lows in October 2023, the DAX has surged by 23%, and it's up by more than 50% since the lows in October 2022.
Notably, Rheinmetall AG stands out among the best-performing large-cap German stock in 2024, boasting a year-to-date increase of 67%.
The automotive and finance sectors in Germany are also displaying robust performances, with Porsche AG VZ up nearly 15% year-to-date, and Mercedes-Benz Group AG up 18%. Additionally, Allianz SE, Deutsche Bank, and Commerzbank are all experiencing a 10% surge year-to-date.
Despite trading at record highs, the DAX index doesn't appear overvalued from a valuation perspective, with a forward Price-to-Earnings ratio of 13x and a price-to-sales ratio of below one.
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As of March 2024, Volkswagen AG (4.2x forward P/E), Commerzbank AG (4.9x forward P/E), Mercedes-Benz Group AG (6.4x forward P/E), and Bayerische Motoren Werke Aktiengesellschaft (BMW) (6.4x P/E) stand out as the cheapest German stocks based on forward P/E ratios.
Analysts project a median 4% increase in revenues for the DAX index in both 2024 and 2025.
Deutsche Börse AG (+12.3%), RWE Aktiengesellschaft (+25.5%), Rheinmetall AG (+36.5%), and MTU Aero Engines AG (+38.3%) are expected to demonstrate double-digit revenue growth in the upcoming year.
However, some companies are forecasted to experience revenue contractions, such as Covestro AG (-20%), E.ON SE (-6%), and Infineon Technologies AG (-3%), while Mercedes-Benz Group AG, Henkel AG & Co. KGaA, Porsche AG and Volkswagen AG are all predicted to show flat revenue growth.
While improving domestic economic conditions, lower ECB interest rates, and global trade recovery, particularly with China's stimulus, could propel German stocks higher, risks remain prominent.
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Recent higher-than-expected inflation in the United States could limit the Federal Reserve's ability to cut interest rates, potentially impacting the DAX index.
Additionally, soaring oil prices and rising natural gas prices may exert pressure on the profit margins of energy-dependent German companies, posing challenges for the DAX index.
