- DAX will rise to 14,000 points by the end of 2018 thanks to a combination of a strong economy, positive earnings momentum and an expansionary monetary policy.
- Start of central bank withdrawal programme will prevent a stronger rise
- Thanks to growing corporate earnings the valuation of the leading index will remain fair at around 13 PER points after the rise.
In our new forecast as at the end of 2018 we are expecting an increase in the German leading index to 14,000 points. The Euro Stoxx 50 should reach 4,000 points. We are expecting an index level at mid-year of 13,800 (previously: 13.500) and 3,950 (3,900) points for the two indices observed.
We expect global economic growth to pick up considerably in 2017/18 and that the growth in the individual states will become more synchronised. The high degree of openness of the DAX companies is likely to lead to index gains in 2018 of between eight and ten per cent in keeping with the good global economic trend. As a result of these gains the DAX can rise to 14,000 points without the valuation having to increase (current PER 2018e: 13.4).
In view of the positive economic picture for 2018, higher levels than 14,000 DAX points are also possible during the year. However, the central bank withdrawal programme which has been started (reduction of the Fed’s balance sheet, restriction of ECB bond purchases) should prevent a more positive price trend as at the end of 2018. The discussion over the future path to be taken by the central banks is likely to act as a drag over the course of the year. However, in view of our long-term yield forecast for fixed income bonds (Bund yields below 2% until 2021), equities remain attractive.
The financial markets should not remain strongly sedated on a permanent basis. Taking the record low level of volatility on the stock market into consideration, it is likely that it will increase again in 2018. The risks for the markets will in 2018 remain the geopolitical conflicts (in particular an atomic dispute in/around North Korea), the elections in Italy, but also the factor of uncertainty Donald Trump. Imminent Brexit is likely to have a short-term impact on the DAX via market sentiment at best as the significance of the operating business of the DAX companies in Great Britain is too low in the long term.
As in previous years, the high valuation of the US stock market will remain a risk for a correction on the global stock markets. Should such a correction come about, our new price target would anyway prove obsolete.
The valuation of the stock markets has reached a high level in terms of the historical average price-earnings ratio (PER) and price-book value ratio (PBV) over the past ten years.
However, the absolute figures are still relatively low, in particular in Europe. In Germany, for example, the PER for the DAX comes to 13.4 for 2018e. Calculating the inverse value of this figure, the shareholder can generate an earnings yield of 7.5%. Looking at the estimated lower PERs for 2019 (DAX 12.1, Euro Stoxx 50 11.9), the stock markets in Europe are even cheaper. The expected dividend payments (DAX 3.0%, Euro Stoxx 50 3.5%) are also convincing. There can therefore be no talk of a bubble forming here in Germany.