German stock index: Has the larger DAX stood the test?

A year ago, Deutsche Börse announced ten new DAX members. How have they fared since then? And is a larger leading index better at the same time?

By Antonia Mannweiler, tagesschau.de

On September 3, 2021, Deutsche Börse announced the expansion of the leading German index from 30 to 40 members. A few weeks later, on September 20, 2021, ten new companies were included in Germany’s most important index. These included the German-French aircraft manufacturer Airbus, the online retailer Zalando, the sporting goods manufacturer Puma, the chemicals dealer Brenntag, the Göttingen laboratory supplier Sartorius, the fragrance and aroma manufacturer Symrise, the meal kit supplier HelloFresh, Porsche Automobil Holding, the medical technology manufacturer Siemens Healthineers and das Biotech company Qiagen from Hilden.

The DAX 30 became the DAX 40. In return, the MDAX of medium-sized companies shrank from 60 to 50 members. One of the aims of the innovation was to better reflect the breadth of the German economy in the important leading index. Stephan Flägel from the index provider Qontigo said at the time: “By expanding to 40 members, we are completing the largest DAX reform in our history and creating a leading index that will represent a larger spectrum of the German capital market.”

DAX now more representative?

Did that work? The leading French index CAC also includes 40 stocks; in the US, the Dow Jones index contains 30 stocks, but the more broadly diversified S&P 500 index, which includes the 500 largest listed companies in America, is more important for the American capital market. The leading indices in Great Britain and Japan also include 100 to 225 companies. The leading German index cannot quite keep up with this – but it has positioned itself a bit more broadly. “I think it’s absolutely right that the DAX has increased,” says Robert Halver, chief investment strategist at Baader Bank. The larger selection only makes the DAX more interesting and now simply reflects the German economy more – even if one can argue about whether some stocks belong in the DAX, says Halver.

From the point of view of Chris-Oliver Schickentanz, future chief investment strategist at Capitell asset management, the DAX 40 reflects the diversity of German industrial culture much better than the 30 values ​​before it. Due to the export-oriented economy, however, the DAX is more a reflection of the global economic situation than of the domestic economy. “For me, it was a successful evolution,” said Schickentanz about the DAX expansion.

Dominance of automotive, chemical and energy sectors

In the past, the dominance of the “old economy” in the DAX was criticized in particular – i.e. the weight of the automotive, chemical and energy sectors in the leading index. In addition to Deutsche Telekom and the software giant SAP, digital groups were hardly represented. With the rise of online retailer Zalando and recipe box mailer HelloFresh, two growth stocks were included in the DAX. The healthcare sector has also been boosted with the rises of medical technology maker Siemens Healthineers and biotech Qiagen.

However, the expansion of the DAX to 40 stocks was only part of a larger reform. It was triggered, among other things, by the scandal of the former DAX member Wirecard. Despite the company’s insolvency, it took some time before the title was dropped from the leading German index. The criteria for admission to the first stock exchange league were then tightened. The important index is checked twice a year – in March and in September. In order to be included in the DAX, companies must show an operating profit in the last two annual financial statements and submit their quarterly or annual reports on time. In addition, the trading turnover is no longer a criterion for inclusion in the DAX – the market value is now particularly important for promotion to the first stock exchange league.

Airbus as a newcomer

Even if the new companies have broadened the DAX, their weight in the overall leading index is manageable. Of the ten stocks that rose to the DAX last year, the rise of the aircraft manufacturer Airbus, measured by market capitalization, was the most significant. With a stock market value of 79 billion euros, the group ranks sixth behind Siemens among the most valuable DAX companies.

The company was included in the DAX at the right time, says Schickentanz. The group started early to include fuel-saving and environmentally friendly aircraft models in the range. In view of the high fuel costs, this is a corresponding factor for many airlines. According to Halver, Airbus was absolutely a win for the DAX.

Since last September 2021, the DAX has fallen by more than 18 percent, which is also due to the generally difficult market environment. With a minus of 15 percent, Airbus has developed slightly better than the leading index from the DAX newcomers. On the other hand, the DAX climbers Zalando and HelloFresh in particular were penalized. Both companies have lost more than 70 percent of their market value since last year. The sell-off of growth stocks, which has been seen since December 2021, has of course hit the young and innovative business models with a lot of future and growth imagination, says Schickentanz. “Therefore, in the first year of this DAX 40 career, they were certainly not the major performance drivers, but rather stress factors for the DAX.”

DAX more attractive at home and abroad?

With the expansion, has the DAX now become more attractive for investors in Germany and abroad? Schickentanz doesn’t think so. You have to keep in mind that in a global stock index, German stocks make up just three to four percent. You also have to clear up a misunderstanding: “Being a member of the DAX does not mean that the share is particularly promising.” It should only reflect the German economy to some extent. But that doesn’t mean that you’re immune to price losses.

From the point of view of many experts, the biggest loser of the DAX reform was the MDAX of medium-sized stocks, which lost ten of its most valuable companies last year. The composition of the DAX could change again in the near future. The next review of the DAX composition is scheduled for September 5th. HelloFresh is considered a relegation candidate; the energy technology company Siemens Energy could then possibly replace the recipe box mailer.