- German economy remains resilient
- DAX benefits from ECB’s monetary policy
- Emerging markets slowdown will be a challenge for 2016
2015 in Review
It has been another testing year for the German economy but once again it has shown the kind of strong resilience that it has become synonymous with throughout the global financial and eurozone debt crises.
The first half of the year in the eurozone was dominated by questions over whether Greece could remain within the eurozone, something that once again called into question the apparent irreversibility of the euro project.
While Greece undoubtedly suffered the most as a result of the prolonged negotiations, other parts of the euro area including Germany did appear to suffer as well, potentially as a result of the uncertainty that a “Grexit” would bring to the euro area. If Greece left, what would stop other countries that are suffering as a result of forced austerity doing the same, such as Spain.
The conclusion of the Greece debacle should have been a big moment for Germany and the rest of the eurozone, removing the uncertainty and allowing it to build on the signs of recovery that had been apparent prior to it. Instead, things have gone from bad to worse for Germany with the Volkswagen scandal, emerging market slowdown and refugee crisis threatening to weigh further on the economy.
Throughout all of this, the economy has remained resilient and is in a good position to build on this year’s progress in 2016. What’s more, the ECB’s very accommodative stance has created an environment that Germany could benefit greatly from.
The German DAX benefited greatly from this between October last year – when it became apparent that the ECB was going to announce its first quantitative easing program – and April, during which time it rallied almost 50%.
As it approached the summer, the DAX pared some of these hefty gains before suffering considerably in August as a result of the sharp sell-off in emerging markets. China is Germany’s fourth largest trading partner so any significant economic downturn here would have ramifications for the economy.
Expectations for 2016
On the bright side for Germany, 2016 is shaping up to be a year of relative calm, particularly compared to years past. While there is always potential for flare ups in the euro area to dampen sentiment, particularly where Greece is concerned, there is nothing at this stage to suggest anything drastic will happen.
Instead a couple of key themes from this year are likely to dominate again and could be the determining factor for the DAX, along with any other surprises that arise in the meantime.
ECB Monetary Easing
The ECB spent the weeks leading up to the December meeting building up expectations of a substantial monetary stimulus package to tackle the low inflation problem in the region, only to disappoint on a massive scale, leading many to question why it had talked it up so much in the first place.
Regardless of why it did this, the 10 basis point cut to the deposit rate, six month extension to the quantitative easing program and increase in the pool of assets it can purchase, is unlikely to be enough to enable the ECB to achieve its target of below but close to 2%. I therefore think more monetary stimulus in the second half of the year is likely, which should offer support to equity indices in the region, including the DAX which is still almost 15% of its highs.
Emerging Market Slowdown
Global growth is expected to slow again next year driven primarily by the emerging markets which could hurt companies that conduct a lot of trade with them. As already highlighted, Germany conducts a lot of trade with the emerging markets, particularly China, so any slowdown here is likely to hurt profits and could therefore company profits.
While easy monetary policy from the ECB will probably mask any difficulties facing German companies as a result of this, as it did in the US and UK for years and the euro area between October last year and April, we need to be wary of a more substantial decline that markets are currently anticipating.
I think this is unlikely at this stage as much of the pain from falling commodity prices has already been incurred while the negative impact associated with a Federal Reserve rate hike also appears to be priced in. There are ongoing concerns of a hard landing in China but I don’t see this as being likely either. While the economy is likely to continue to grow at a slower rate in the coming year – falling to around 6.5% by 2020 – the large fiscal and monetary stimulus packages should ensure a hard landing is avoided.
All things considered, I think 2016 is going to be a good year for Germany and the DAX without the kind of disruptions that have stunted growth in 2015. The ECBs loose monetary policy should support economic growth and the DAX, while I expect the slowdown in emerging markets to be less severe than some think which will enable the country to have a relatively peaceful year, by recent standards.