Goldman Sachs offers insights into the poor performance of the DAX index
Germany's plans for a significant increase in public spending have sent ripples through European markets. The country, known for its strict control of public debt, has pledged hundreds of billions of euros for defense and infrastructure investments, marking a notable shift in its economic strategy.
According to the plans, Germany will invest 100 billion euros annually starting in 2025 from a special fund for infrastructure and climate neutrality. This fund aims to modernize roads, bridges, railways, schools, hospitals, and strengthen external and internal security including military capabilities. In total, federal investments in 2025 will amount to about 115 billion euros.
These investments are aimed at boosting the economy and providing security against threats such as Russia's invasion of Ukraine. However, some critics suspect that these funds might be used to replace state budgets rather than stimulate additional investments.
The European Stoxx 600 Index, which had been leading the pack, has since lost its lead as investors have flowed back into US stocks due to signs of robust economic growth and expected interest rate cuts. The phase of interest rate cuts in the US is just starting and could last until the end of 2026, offering potential for further upside in US stock markets.
Meanwhile, the DAX, Germany's stock market index, has decreased by -3.48% since June 5th, while the S&P 500 has increased by +10.35%. Current analysis data on ETF cash flows for July and August show outflows from Europe, with the phase of interest rate cuts by the ECB having ended, offering less interest rate euphoria for Europe.
The shift in Germany's spending strategy has also raised doubts about a rally in European stocks. Goldman Sachs strategists have expressed doubt about a rally in European stocks due to uncertainty around Germany's comprehensive tax reform. Some investors have questioned when the promised massive stimulus measures will translate into corporate earnings.
Despite these uncertainties, analysts predict that corporate earnings in Europe will increase by 4% and 6% in the next two years, supported by improved economic growth. The Stoxx 600 is predicted to rise by about 5% over the next 12 months.
However, the European market landscape is not just about Germany. There is an AI boom in the US that is attracting investor money, with funds seemingly being sucked out of Europe. Additionally, recent outflows of investor funds have been observed from non-Eurozone country Britain.
A recent survey by Bank of America found that allocation to European equities decreased in September, but none of the survey participants expected a decline of more than 5%. Despite these challenges, the European market continues to hold promise for long-term investors.
However, it is important to note that there are ongoing concerns about a misallocation of 'special assets' in Germany, and the France crisis and the current recession in Germany are dampening the mood among Dax, CAC40, and other European stocks.
In conclusion, Germany's shift towards increased public spending is a significant development in the European market. While it offers potential for growth and security, it also introduces uncertainties and challenges that investors will need to navigate carefully.
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