MW Germany's Magnificent 7 allowed the DAX to defy economic gloom, says Goldman Sachs

By Jamie Chisholm

The German economy is slowing as the country is battered by a myriad of damaging domestic and global issues. Yet Frankfurt's DAX index of blue chip stocks sits less than 3% shy of a record closing high touched last week, having risen about 9% so far in 2024.

How has the DAX DX:DAX managed to defy the economic gloom? Thank the country's own Magnificent 7, says Goldman Sachs.

In a note published Tuesday, a team of Goldman strategists led by Guillaume Jaisson examined why Europe's biggest economy was struggling and why it's benchmark equity index has proved so defiant.

"Our current activity indicator $(CAI)$, which tracks the German GDP, has been below zero for more than two years," said Goldman. "It is not driven by one unique factor. All the CAI sub-components are in the red: hard and soft data, manufacturing and services data, labour and consumer data."

The problems for the economy are many. The German economy is particularly exposed to the manufacturing sector which has been hit hard by monetary tightening, stretched supply chains and the inventory cycle, according to Goldman. Energy intensive sectors have been hit the hardest.

Germany is also exposed to China, currently suffering from that economy's weak imports and competition from its exports, including chemicals, autos and industrials.

De-industrialization, particularly in the automotive sector is a problem. Goldman notes that Volkswagen recently said it's considering German factory closures for the first time in its 87-year history.

Demographic challenges also weigh. A notable decline is expected in the working-age population in coming years. The rise of populist parties on the far right and left adds to the political uncertainty.

In summary, Goldman said: "Our economists expect 0% GDP growth in Germany in 2024 (after -0.1% in 2023) and only a fragile acceleration to 0.9% in 2025, slightly below consensus."

However, despite all this Goldman notes that the DAX index rose 20% in 2023, is up 9% so far in 2024 - despite the auto sector shedding 13% -and trades on a price to earnings multiple of 11.9 times, which is in-line with its historical average.

"The DAX has been resilient because it is not really tied to the German economy. Only 18% of its sales are made in Germany," said Goldman.

And for the benchmark's overall stoicism investors must thank what Goldman describes as Germany's own Magnificent 7; Allianz (XE:ALV), Deutsche Telekom (XE:DTE), Merck (XE:MRK), Munich Re (XE:MUV2), Rheinmetall (XE:RHM), SAP (XE:SAP), and Siemens Energy (XE:ENR).

Together the German Mag. 7 are up 31% and account for 100% of the DAX's returns year-to-date as the shares have benefited from a mix of restructuring stories, pricing power, and a focus on shareholder return, including buyback programs, according to Goldman.

"Also, some of them keep benefiting from specific tailwinds: geopolitics (Rheinmetall), electrification (Siemens Energy) and AI/Cloud $(SAP)$," Goldman added. Indeed, SAP alone accounts for more than a third of the DAX return in 2024.

Returning briefly to the macroeconomic backdrop, Goldman thinks "the pessimism around Germany is unlikely to go too far" because some of the the country's "recent challenges reflect cyclical and thus temporary factors."

And next year analysts' consensus expects the DAX to outgrow the rest of Europe, with 12% earnings per share vs. 10% for the STOXX 600 XX:SXXP.

"Based on consensus data, we would expect 33% of the DAX earnings lift to come from four of our Equity Research analysts' Buy-rated companies: SAP, Airbus (XE:AIR), Porsche (XE:P911), and Deutsche Telekom," said Goldman.

-Jamie Chisholm

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September 10, 2024 08:54 ET (12:54 GMT)

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