Volkswacht Bodensee - Defying headwinds, German stocks hit milestone

The index, which groups the 40 largest publicly-traded companies on the Frankfurt Stock Exchange, hit the milestone early in the session and closed the day up 0.4 percent at 20,016 points.

The German economy, hit hard by a manufacturing slowdown and weak demand for its exports, has struggled in 2024 and is on course to contract for a second straight year.

Adding to the challenges are heightened political uncertainty as the country heads for new elections in February following the collapse of Chancellor Olaf Scholz's ruling coalition, and the threat of new US tariffs under President-elect Donald Trump.

But the DAX has nevertheless surged ahead, rising more than 19 percent since the start of the year.

"Neither a government on standby, nor recession concerns could dampen sentiment," said DZ Bank in a note.

This was in large part because the companies on the DAX "generate a large share of their sales abroad," it said. "While a weak domestic economy may not be desirable, global developments are the most important factor for share prices."

In addition, the euro's recent weakness has boosted Germany's export-oriented companies, while easing interest rates both in the eurozone and the United States have also helped sentiment.

Key German firms with big overseas footprints include Deutsche Telekom, whose US subsidiary T-Mobile operates the largest 5G network in the United States, insurer Allianz and software giant SAP.

German markets have thus benefitted from the same forces that have seen Wall Street stocks hit fresh records since Trump's election win, with investors cheering his promised tax cuts and deregulation.

- Economic recovery hopes -

German stocks have also been lifted by hopes that Beijing will unveil fresh stimulus to kickstart the world's number two economy -- which would support Germany's crucial exporters, for whom China is a key market.

In addition, markets are betting that the German economy will start recovering in 2025 after a torrid two years marked by surging energy prices following Russia's invasion of Ukraine and post-pandemic supply chain woes.

Investors are "looking at least nine to 12 months ahead", said independent stock market analyst Andreas Lipkow.

Some stocks on the DAX have performed strongly due to specific factors.

Weapons manufacturer Rheinmetall is up 120 percent since the start of the year, boosted by strong demand for its defence products as countries rush to re-arm following the outbreak of the Ukraine war.

Siemens Energy has risen more than 320 percent as it rebounded strongly after receiving a state-backed bailout last year to resolve a crisis in its wind power unit.

It is a different story for the country's auto titans -- Volkswagen, BMW and Mercedes-Benz -- whose shares are down between 15 and 30 percent since January as they battle high costs, weak demand and fierce competition in China.

A key challenge for next year could come if Trump imposes hefty tariffs on all imports to the United States, with the German central bank warning such a move could knock one percent off the country's growth.

But at home, investors are hopeful the resolution of ongoing political problems will have a positive effect, said Jochen Stanzl, chief market analyst for Germany with CMC Markets.

"There is hope that new elections in Germany will produce a government that will stimulate growth," he said.

L.Wyss--VB