Political turmoil, economic weakness, German stocks rely on the "Seven Giants" to survive and save the situation

Despite sluggish economic growth and political turmoil in Germany, the German stock market has risen against the trend, outperforming other major countries in Europe. Data shows that this year, the German DAX index (composed of 40 blue-chip stocks) has increased by 18.7%, surpassing the benchmark indices of France and the UK, and far ahead of the 4.8% increase in the STOXX Europe 600 index.

Behind this strong performance is the powerful drive of the "German version of the seven giants," as well as the advantages of German companies' internationalization strategies. Timothy Lewis, a portfolio manager at JP Morgan Asset Management, stated that the performance of the DAX index is "surprising" and "well illustrates that stock market performance does not always synchronize with economic performance."

"German Version of the Seven Giants" Leads the Surge

The German economy is currently experiencing a downturn. According to economists at Consensus Economics, the economic growth forecast for Germany in 2025 has been downgraded from 1.2% in mid-year to 0.6%, marking the largest downgrade among major industrial economies. At the same time, the German government is facing a split in the ruling coalition due to controversies over the "debt brake" reform, leading to early elections in February next year, complicating the economic outlook further.

Nevertheless, the German stock market continues to rise against the trend. Firstly, only a quarter of the earnings of DAX index constituents come from Germany, and the international revenue sources provide a buffer for these companies amid economic turmoil. For example, automotive giant Volkswagen plans to lay off tens of thousands of workers and close several factories, but the overall impact on the stock market is limited.

Secondly, the strong performance of the DAX index this year is primarily driven by seven companies: software giant SAP, defense company Rheinmetall, industrial group Siemens, Siemens Energy, Deutsche Telekom, and insurance companies Allianz and Munich Re. These seven companies are also referred to by the market as the "German version of the seven giants."

Among them, software giant SAP's contribution is the most prominent, accounting for nearly 40% of the DAX index's increase. Thanks to its strategy of transforming its business customer operations to cloud services and capitalizing on the hype around artificial intelligence stocks, SAP's stock price has risen over 70% this year. To attract North American investors, SAP even adjusted its earnings report release time from the European morning to after the US stock market closes, aligning with US trading hours. In October this year, SAP surpassed Dutch semiconductor equipment manufacturer ASML to become the largest technology company by market capitalization in Europe.

Marc Halperin, co-head of European equities at asset management firm Edmond de Rothschild, stated: "Tech stocks are the stars of this year; unfortunately, Europe only has two major tech companies: ASML and SAP. Artificial intelligence is just the icing on the cake."

In addition to tech stocks, the defense and energy sectors have also been highlights of the German stock market this year. Defense company Rheinmetall's stock price soared by 107% this year due to geopolitical tensions and expectations of increased European defense spending. Siemens Energy's stock price surged by 329% due to a spike in demand for renewable energy Other leading companies such as Deutsche Telekom, Allianz, and Munich Re have also provided important support for the DAX index due to their robust performance in their respective fields.

Thirdly, the euro to US dollar exchange rate has fallen from 1.11 to 1.04 since the end of September. The weakening euro has also supported Germany's export-oriented market, further enhancing the competitiveness of the German stock market.

Increased Concentration in German Stocks, Heightened Structural Risks

Despite the strong upward trend, the gains in the German stock market are increasingly reliant on a few companies, raising concerns about structural risks in the market. Goldman Sachs strategist Guillaume Jaisson pointed out that the DAX index is showing a trend of "polarization," where a few leaders perform exceptionally well, while many export-oriented companies face the dual pressures of weak consumption and US trade tariffs.

Union Investment manager Arne Rautenberg warned that the DAX index is overly dependent on the earnings fluctuations of a few giants like SAP, which may lead to market instability. External factors such as the election of Germany's new government and potential adjustments to the debt brake policy, US President-elect Trump's trade tariff plans, and China's economic stimulus measures could also impact the market.

Despite concerns about high concentration, many fund managers remain optimistic about the German stock market. On one hand, German stocks are valued lower compared to the US stock market, presenting a discount effect. On the other hand, a significant portion of German companies' revenue comes from overseas markets, demonstrating greater diversified resilience.

Janus Henderson portfolio manager Marc Schartz believes that unlike the US market, which is concentrated in technology stocks, the leading companies in the German market are distributed across multiple sectors, such as technology, defense, energy, and insurance, showcasing greater diversity. He stated:

"It is not a bad thing for market growth to be driven by more diversified companies; the companies we invest in are multinational enterprises operating across Europe and are not limited to the business influence of a specific country or region. These companies are simply listed on the exchange of a particular country (for example, Germany)."