Weekly Market Outlook

No End to Strategist Gloom Even as DAX Leads Europe Stocks

Strategists aren’t buying the optimism on German stocks.

While the DAX Index is up for a second month and came within 4 points of erasing its 2016 drop this week, professional forecasters cut their year-end targets on the gauge for an eighth time. They’re now projecting the DAX will slide 7 percent this year, according to the average of 12 estimates compiled by Bloomberg. It slipped 0.6 percent at 9:25 a.m. in Frankfurt.

Better-than-projected results at companies from SAP SE to Adidas AG and optimism that central banks will remain accommodative have helped the DAX rebound more than 20 percent from its low in February, entering a bull run last week and beating regional peers. Sylvain Goyon, a strategist at Natixis SA, says political turmoil and economic sluggishness are poised to drag it back down. He expects the equity index to fall 3.7 percent this year to 10,350.

“The prospects will not be that bright for the rest of the year,” Goyon said from Paris. “From the start of the year, we knew that we would be in for difficult times because we knew we would be hit by reality. We are seeing a slower potential for growth than we saw earlier.”

After a fourth straight year of gains in German stocks, the DAX started 2016 with some of the biggest losses in the world. While it recovered almost completely, becoming one of the top-performing equity gauges in western Europe, concerns about companies’ profitability amid growth cuts still linger. Economists forecast the German expansion will slow to 1.5 percent this year, down from projections of 1.8 percent in January.

Adding to the worries is a busy political calendar. A referendum in Italy likely in November threatens the fate of its prime minister. German Chancellor Angela Merkel’s popularity has been dwindling amid a refugee crisis, before elections next year. And the U.K., which voted to leave the European Union, has yet to start negotiating the terms of its exit.

The German stock slide that strategists project would mark the DAX’s worst year since 2011, when it dropped more than the Stoxx Europe 600 Index as Commerzbank AG lost 70 percent of its value while the region battled its sovereign-debt crisis. The German index then surged more than 25 percent in each of the two following years, beating peers. For the Stoxx 600, strategists forecast an 8.6 percent drop in 2016.

Bulls are pointing to cheap valuations — DAX companies trade at 12.7 times estimated earnings, near a record low relative to the Stoxx 600 — and note that the weakening in profit growth predicted for German firms is far smaller than for the region. Analysts expect net income at DAX companies will slide 1.9 percent this year, compared with a 4.1 percent drop for Stoxx 600 members.

Still, for Lampe Asset Management’s Michael Woischneck, the recent rally might be overdone given the potential hurdles ahead. German companies, many of which are exporters, will also suffer from a slowdown in the global economy. It’s forecast to grow 2.9 percent this year, the least since 2009. Economists already cut their predictions three times since January, including after the British vote to leave the EU.

“The market has run up too high too fast,” said Woischneck, a senior equities manager in Dusseldorf, Germany. He helps oversee 6.4 billion euros ($7.3 billion) and has about a third of his holdings in German stocks. “The DAX is the index of globally entwined companies, which really depend on stable global growth. As the uncertainty from Brexit drags on and on, that’s not the market or the environment for such an index to do well in.”