In light of current market dynamics, is China's influence on the DAX surpassing Germany's?
For a while now, we've been hearing predominantly poor to disastrous news coming from the German economy. Remarkably, this hasn't significantly impacted the main index of the local stock exchange. Recently, news about China's economic policies has propelled the DAX to new heights. Capital market strategist Philipp Vorndran from asset manager Flossbach von Storch explains to ntv.de in an interview why China, unlike Germany, plays a significant role in influencing the economy. However, Vorndran isn't holding high hopes for the economic package recently unveiled by Beijing.
ntv.de: It seems that China holds significant importance not only for Germany's economy but also impacts companies listed on the DAX more than Germany's own economic growth. Is this true?
Vorndran: China is a crucial factor for the global economy, and its significance is particularly noticeable in Germany because our economy is heavily export-dependent. Many German companies, especially in the automotive and machinery manufacturing sectors, have heavily relied on China as their main sales market. Consequently, they've been severely affected when China's economy slows down, as it has been for several quarters now. China is grappling with structural problems, such as youth unemployment, a troubled real estate market, and increasingly state-directed economic management. All these issues, coupled with demographic changes, are hampering growth momentum. Despite this, Beijing hasn't taken any substantial economic stimulus measures until now. The recently announced package, though modest, has caught everyone's attention: Perhaps the leaders in Beijing are now thinking more strategically, considering the larger economic picture. This may be why we saw a rise in the DAX. However, it remains doubtful whether it will help in the long term. The package simply isn't sufficient to address China's structural problems.
It appears that the economic measures announced by the German government haven't had any noticeable impact on the DAX at all. Germany's economy isn't a major factor, then?
Even Germany has its share of challenges that can't be overcome with financial incentives overnight. Even if we were to invest 50 billion euros into infrastructure projects right away, we would still be lacking the necessary manpower and companies to construct railways, highways, and new bridges. Investors, therefore, remain cautious about the potential impact of economic measures in Germany.
Would the situation be different if China could boost its domestic consumption once again?
It would be a significant game-changer if Chinese consumers could resume their previous spending habits. However, Chinese consumers are currently focused on one thing: saving! They're concerned about the security of their jobs and income. Youth unemployment is rampant, and even civil servants, traditionally considered a secure employment group, are being asked to accept pay cuts. As a result, consumers are saving their money, which is reflected in the earnings of companies like Louis Vuitton and BMW.
The attention devoted to China's economic and monetary policies in comparison to Germany's, therefore, stems not just from the size of China as a sales market but also because of the dynamic changes taking place there.
If China could successfully encourage its population to increase spending, this would have a hugely positive impact on the global economy, particularly on Germany's export-oriented industry. However, according to Vorndran, the recently announced measures are not up to the task, and he doesn't anticipate any immediate economic stimulus packages to follow. He fears that we may have to say goodbye to the robust growth rates of six, seven, or eight percent that China was once known for, and instead expect two to three percent growth for the foreseeable future. This growth will mainly come from exports, with a particular focus on the automotive industry. For German industries, this presents a double challenge: the sluggish market in China and the reliance on exports for growth, primarily in the automotive sector. The recent profit warnings issued by Mercedes and BMW reflect this situation accurately.
Given the importance of China for these companies and the developments described above, are these profit warnings an indication of what DAX investors can expect in the medium term?
It certainly doesn't look good for DAX companies. However, things are even grimmer for smaller companies, which may have limited exposure outside Germany. The DAX, with its globally oriented large companies, continues to be the bright side of the German economy. Nevertheless, it's only logical that the slowdown of China, the most crucial growth market of the past four decades, would also impact DAX companies.
The importance of China for German companies appears to be on the decline, while the United States is once again gaining prominence?
Precisely! The situation for German companies in China is likely to become more difficult. And this trend is unlikely to reverse, especially in the wake of the next US presidential election, irrespective of the candidate elected. As Europeans, we may soon have to choose a side, which means breaking ties with one of these vital sales markets.
Max agrees wholeheartedly with that statement. It'd be great if we could broaden our sourcing options beyond the USA and China, which we haven't managed so far. The potential free trade deal with Mercosur, an economic area in South America, has been hanging in the balance for about two decades now. But we Europeans haven't sealed the deal because our environmental and labor rights standards aren't guaranteed. This leaves the door open for the Chinese to swoop in and take over that market! Expanding into new sales territories is a challenge if we're only keen on sticking to our own regulations. The other option would be to solely manufacture for Germany, but regrettably, Germany's growth prospects aren't all that promising. Our economy has always thrived on international trade.
Max Borowski and Philipp Vorndran discuss this matter
Despite Germany's economic challenges, its economy isn't as influential in moving the DAX as China's economy due to Germany's heavy reliance on exports, particularly to China. This economic and monetary union between Germany and China plays a significant role in influencing German companies, as demonstrated by the impact of China's economic policies on the DAX.
The Economic and Monetary Union between Germany and China has led to a situation where Chinese economic policies have more impact on the DAX than Germany's own economic growth. This highlights the interconnectedness of these two economies and the reliance of German companies on China as a major sales market.
