Paul B
Paul B
Sep 3 · 4 min read

The Dax 30 is a stock market index comprising of the 30 largest German companies that are trading on the Frankfurt Stock Exchange. Unlike other larger indices, the DAX comprises of only 30 companies which makes the price movement of the index far more volatile. This makes it a lot more attractive to day traders, but if your goal is to buy and hold or in the crypto world what we like to call ‘HODL’, there can be safer alternatives available in the market.

Since the stocks underlying the DAX 30 comprise of German stocks, there is a great deal of correlation to not just macro-economic factors in Germany, but factors in the euro-zone as well. The DAX does represent approximately 75% of the aggregate market cap on the Frankfurt Exchange, you would imagine that this would mean that the DAX would be a good representation of the German economy, some would disagree. To better understand why, lets break down the different factors that impact its price movement.

The first factor that we can consider is the underlying stocks in the DAX. Known as a manufacturing powerhouse, its no surprise that several of the largest German stocks comprise of manufacturing companies such as Siemens, Bayer, Daimler. One case that can be highlighted is the very famous VW emission scandal. At a time when most European stock index futures were positive, the DAX was in the red, primarily because of the massive fall in price of VW shares after their scandal.

tradingview (livecharts)

Sticking with VW as an example. In 2018, the largest market for Volkswagen was China followed by Germany. A big slowdown in the auto industry in China or other developing markets would have a negative impact on the VW shares and would weigh down the DAX. Given that so many German companies are extremely outward facing and international, economic factors outside of their home market also play a big role in impacting its price. The next factor could be decisions taken by external regulators, which some could argue are political factors rather than being purely legal issues. For example- Deutsche Bank paid over 10 Billion USD to regulators in the United States which would heavily impact its bottom line. These incidents also cause downward pressure on stocks which in turn impact the entire index in general.

Expansionary government policies have a positive effect on stock returns. Lower interest rates lead to excess liquidity which can increase the demand for stocks and causing their prices to rise as a result. An additional benefit is the lower cost of capital which helps companies increase their investments and have a positive impact on future cash flows.

Perhaps the most interesting factor that we found in our research was the German Stock market was negatively affected by a positive Consumer Confidence Index. Yes, you read that correctly. The reason put forth by Celebi & Honing was that in their findings they saw an inverse relationship between consumer confidence and savings behaviour. Lower savings would lead to higher consumption. However, the composition of the DAX 30 index is made of relatively less consumer centric companies. If the consumer confidence is slow and consumption dips, savings will increase, as will investment. This will result in higher supply of capital in financial markets and an increase in stock prices. Bit of a woozy I know.

If you have a different view/findings we would love to hear more.

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Disclaimer

This material should not be the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions, and is not related to the provision of advisory services regarding investment, tax, legal, financial, accounting, consulting or any other related services, nor is a recommendation being provided to buy, sell or purchase any good or product.Any views expressed on XP Invest blog are the personal views of the authors. The information and data herein have been obtained from sources we believe to be reliable. Such information has not been verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgment of the authors of the report at the date of this communication and are subject to change at any time without notice. XP Invest will not be liable whatsoever for any direct or consequential loss arising from the use of this publication/communication or its contents.

References

https://www.youtube.com/watch?v=Bnvw-63rO9k

https://www.youtube.com/watch?v=JKSTyGnqxWg

https://www.econstor.eu/bitstream/10419/179124/1/1023487063.pdf

XP Invest

Cross-asset trading platform. Use your digital assets to unlock new trading opportunities.

Paul B

Written by

Paul B

Manager at XP Invest, we help you trade cross-assets.

XP Invest

XP Invest

Cross-asset trading platform. Use your digital assets to unlock new trading opportunities.

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