Troubled Dax is hit hard by Germany's weaker growth
The index has plunged by just under 17.5% since 23 January, taking it perilously close to bear market territory.
Thursday 25 October 2018 21:58, UK
It has been a torrid 2018 for the Deutscher Aktien Index, better known as the Dax, Germany's blue-chip stock index.
Having hit an all-time intra-day high of 13,596 on 23 January this year, the index has since plunged by just under 17.5%, taking it perilously close to bear market territory.
The decline confirms Germany's stock market to be one of the worst performers in Europe so far in 2018. The Dax is down some 12.3% since the beginning of the year, compared with declines of 9.4% for the FTSE-100 in Britain, 6% for the CAC-40 in France and just 5.8% for the AEX in the Netherlands.
Only the MIB in Italy and the IBEX in Spain, respectively both down 13.6% and 13% respectively, have fared worse than the Dax.
The wider comparison is no less flattering. In the US, the S&P500, the Dow Jones Industrial Average and the Nasdaq are all showing year-to-date gains, while Japan's Nikkei 225 is only marginally down so far this year.
Among major economies only China's blue-chip index, the CSI 300, has suffered anything like as bad a reverse.
Moreover, among its European peers, the fall suffered by the Dax has been more precipitous.
The FTSE-100, for example, is merely back to where it was in April this year. The CAC-40 has retraced its steps only back to where it was in March last year.
The Dax, by contrast, is now languishing at levels last seen in December 2016.
So what's behind this reverse?
Partly, it is because of worsening prospects for Europe's biggest and most important economy.
Two weeks ago, the German government downgraded its official growth forecasts sharply, predicting growth in both 2018 and 2019 of just 1.8%, down from the previous predictions of 2.3% and 2.1% respectively.
That is not all bad news. Next year will see the German economy enter its 10th year of expansion. That marks the longest run of unbroken growth since the post-war Wirtschaftswunder, or "economic miracle", propelled the old West Germany to spectacular growth in the 1950s and 1960s.
But it is weaker growth than Germany would have liked. And it is the reasons for that weaker growth that chiefly explain why the Dax has hit the skids.
It is often assumed that the FTSE-100 is the most global stock index in Europe and, indeed, it does contain many constituents - notably the mining companies - whose activities are based not in the UK but elsewhere in the world.
Yet the Dax, too, is an incredibly global index, full of companies such as the sportswear and equipment maker Adidas, the Nivea-to-Elastoplast group Beiersdorf, the carmakers Volkswagen, Daimler and BMW, the drug makers Merck and Bayer and the car parts maker Continental, that make far more of their sales and profits outside Germany than they do at home.
Moreover, it is packed with industrial companies that are highly cyclical and geared towards an upturn in world trade, such as the industrial gases group Linde, the chemicals group BASF, the steelmaking giant Thyssenkrupp and the plastics group Covestro.
There is a trade war raging between the United States and China and international trade flows are set to be weaker.
For a country that thrives on its exports, particularly of sophisticated machine tools to China, that poses a threat.
Another Dax constituent, Heidelberg Cement, the world's second biggest cement producer, highlighted those concerns last week with a profits warning. Its shares have lost nearly two-fifths of their value so far this year.
Semiconductors group Infineon Technologies, whose fortunes are highly dependent on China, has lost more than a quarter of its value so far this year.
Germany is seen by many fund managers as a proxy for world trade. Accordingly, if as an investor you are concerned about the world trade outlook, you will sell the German market above all others.
Some individual companies in the Dax have also been beset by problems particular to them.
For example, shares of Thyssenkrupp, which has suffered some very specific issues this year, have fallen 30% since the day in January that the Dax hit its peak. Lufthansa is down by 40% since the start of the year amid tougher competition in the European short haul aviation market and higher fuel prices.
It may also be the case that some international investors wishing to invest in the Eurozone have rotated out of German stocks.
Germany would have been the natural destination in years gone by for investors seeking Eurozone exposure but neighbouring France, boasting a dynamic young business-friendly president pushing through a relaxation of the country's strict labour laws, suddenly looks comparatively more attractive.
Another factor that may be coming into play is German domestic politics.
The CDU/CSU and the SPD, the two political groupings that have governed Germany since the war, have seen their powerbases eroded by unpredictable and often extremist newcomers.
The anti-immigrant far right AfD has made deep inroads into the vote of Chancellor Angela Merkel's party, the CDU, and its Bavarian sister party, the CSU.
On the centre left, the SPD faces an existential crisis, with the Greens and the hard-left Linke both eating into its share of the vote.
None of this means that Deutschland AG should be written off. Germany's biggest businesses are rightly renowned for their preparedness to invest in research and development and taking a long-term approach.
Its professional managers, hailing from a country where engineers enjoy respect and esteem far higher than in the US or the UK, are among the world's best and particularly in the automotive sector.
For example, the way Volkswagen's management oversaw a recovery in the company's fortunes, in the wake of the emissions scandal, deserves to be taught at business school.
Yet this is an economy and a stock market highly geared to global trade. And, for now, prospects for global trade are far from healthy.