Many investors still haven’t got over the disappointing stock market year of 2018. The subdued sentiment quickly overlooks the fact that markets are currently staging the best start to the year in almost three decades. International stock markets have started to rebound in 2019, with the S&P 500 gaining 8% since the beginning of the year – the best start to market trading since 1991. The DAX has also gained 7%. The German benchmark index would have started even better if it had not been for the adverse effects from the accusations surrounding Wirecard and the disappointing outlook at Henkel and thyssenkrupp. All in all, investors have boldly gained exposure to last year’s losers in the course of this year. The important car stocks in the DAX, on the other hand, have staged a „market-neutral“ development and have only performed as well as the index.
We view the current upswing in share prices primarily as a direct response to the plunge in share prices last year which were almost in free fall in December. The last time there was a price plunge of the kind seen in 2018 (DAX: minus 18%, Euro Stoxx 50: minus 14%) was in 2008 after the Lehman crisis. This time, however, there are no signs of a major crisis or impending economic recession.
In December, many investors focused solely on the falling prices. Now, at last they are finally shifting their attention back to the things that count, such as profit development and valuation. As regards valuation in particular, the situation looks much better now that share prices have fallen. Despite the downbeat sentiment and serious problems, it is important to remember that the economy is growing. Overall, the companies are very profitable. We will soon be publishing our annual dividend study and expect record distributions of EUR 46 billion in Germany. German companies are in better shape today than ever before.
Nevertheless, the returns attainable on stock markets looking ahead will decrease in the future. Almost ten years since the stock market slump in March 2009, the best years on the stock market are over. Trump, trade disputes, Brexit and ongoing political conflicts will lead to fluctuations in 2019.
For us, the correction in the second half of 2018 was a warning shot that investors would do well to remember. Stock market prices are highly sensitive when looking to the future. The DAX should still manage to creep upwards towards the 12,000 point mark in 2019. We are not saying this because we are born optimists: of key importance for future price developments are corporate profits and the valuation parameters ascribed to shares. The development of profits depends on the economic situation. In 2019/20 we expect weaker growth than in previous years. At the moment, business is not doing quite as well as in previous years, partly because of the structural challenges facing the automotive sector. But the big players from the insurance, consumer and healthcare sectors will succeed in more than compensating for this dip, and the DAX companies can still be expected to chalk up a slight increase in profits in 2019.
The second factor, stock market valuation that is driven by market sentiment and interest on investment alternatives, shows a favourable valuation. This can be seen in the dividend yield of 3.5% on the DAX and 4.1% on the Euro Stoxx 50 which investors can expect if they gain exposure today. No alternative investments exist on the bond side due to the absence of interest.