“Flops, failures, and fumbles” – it is hard to find a better way of describing the first few years of the “Nemax 50” stock index launched in 1997. Although back then, during the high of Neuer Markt, Deutsche Börse was pursuing ambitious goals with its revamping of its indices, breathing fresh air into the DAX’s somewhat musty reputation. The “Nemax-World” took its cue from the NASDAQ segment in the US, a highly successful hodgepodge of stocks of tomorrow from the fields of technology, telecommunications and biotech.
The index, which was renamed “TecDAX” in 2003, has largely recovered from its teething troubles, which included a few harmless skirmishes, but also cases of price manipulation, fraud and bankruptcies. Although many market players that have been on the exchanges for some time still have a slightly negative view of the TecDAX (at this point it bears citing the label “Solar-DAX” as the direct result of extensive subsidies for photovoltaic systems in Germany), it is no longer fair to paint a negative picture of the technology index. Hardly any of the companies listed on the TecDAX can be compared to the flops of the early noughties. Companies in the index such as Bechtle, Carl Zeiss Meditech, Qiagen, United Internet and Sartorius have for years stood for continuity (and profitability) and in the form of Wirecard soon the very first TecDAX-listed company will probably be promoted to the DAX. Moreover, the TecDAX is benefiting from the ongoing “injections of fresh blood” as smaller, fast-growing companies are regularly included in the index. Success stories in the recent past include corporations such as Cancom and Nemetschek, whose market capitalisation has surged.
Unfortunately, to date Germany has not produced a company that is in the same league as the Americans’ “FAANG” (Facebook, Amazon, Apple, Netflix, Google/Alphabet) or China’s “BAT” (Baidu, Alibaba, Tencent). However, the upturn in the US and Chinese super-corporations has likely kindled greater enthusiasm and demand in Germany for TecDAX stocks.
This can also be seen from the price surge in TecDAX-listed paper: Since the beginning of the current bull in March 2009 the index has climbed over 650 percent, or by 22 percent a year. During the same period, the DAX gained “only” 13.7 percent a year.
The success of the “small caps” derives from their composition. Many of the companies possess the characteristics of so-called hidden champions, the covert world market leaders. This means they are often positioned in niche markets, offer products that are global leaders and have an anchor shareholder, often dominated by a family. Thanks to technological progress and by focussing on long-term goals, these companies are frequently able to grow far faster than the large DAX-listed corporations. As a result, the profits of the small caps have often performed far more dynamically than that of their DAX-listed counterparts. The high profit growth rates of 20-4o percent also explain why investors are at present also prepared to pay a risk premium for TecDAX stocks.
Globally speaking, tech stocks have in recent months been among the major stock market drivers. This can also be gauged from the current level of the TecDAX. With a PER of 28, it is at present 40 percent above the average since 2003. Various heavyweights such as Wirecard or Sartorius have PER valuations of around 50. The PER valuation premium compared to the DAX is 122 percent, or well above the historical value of 61 percent. This is undoubtedly a danger sign.
We assume that by mid-2019 the DAX will have climbed to 13,300 points. While the overall conditions are deteriorating (among others, the risk of international conflicts), thanks to an ongoing dynamic global business cycle corporate profits look set to rise further. One cannot expect that investors will in the foreseeable future turn their backs on the stock market. The upturn in the stock market will therefore presumably continue and TecDAX-listed stocks should likewise gain ground. We believe that as in previous years, in 2018 and 2019 the TecDAX will perform more dynamically than the DAX, and profit growth of up to 15 percent seems possible. We attribute this among others to the stronger focussing on trend themes.
What investors should however realise is that if the DAX is to undergo a correction of 20 or 30 percent then, given the maxed valuation of TecDAX stocks, it could at any point in time come to a correction of 50 percent or more.