Germany: A resilient market

With not only growth but also inflation tanking recently in the Eurozone, Germany’s DAX Index has continued to outperform broader European equities, delivering a 14.8% year-to-date return and outpacing its peers by 4.8%. This strong performance can be attributed to several factors, supported by specific tailwinds in AI and cloud computing, beneficiaries from the electrification theme, and financials. In contrast, consumer cyclicals have lagged, weighed down by concerns surrounding the automotive sector and sluggish economic growth in Germany.

However, these headwinds have had a limited impact on the DAX thanks to its diversified revenue stream – over 80% of which comes from outside of Germany. As a result, German large cap stocks have remained resilient compared to the MDAX (higher exposure to the domestic market), which has underperformed by 12.4% year to date. In addition, the troubled automotive sector accounts for less than 10% of the DAX Index, reducing the potential impact of restructuring efforts (i.e. Volkswagen), tariffs and exposure to China. 

We expect an ongoing recovery driven by improving global macroeconomic data and a rebound in manufacturing activity from a low base. Earnings estimates for 2025 have been revised, with the DAX projected to outgrow the rest of Europe. With valuations in line with historical averages and support from the European Central Bank’s ongoing rate-cutting cycle, we remain positive on German equities despite the three-party coalition government experiencing tensions over a stagnant economy, which may impact its stability before next year’s elections. Finally, our preference for adding cyclicals aligns well with the DAX, which is heavily weighted towards companies that are sensitive to the business cycle.

Switzerland: More downward pressure on inflation

Swiss inflation receded further and more sharply than expected in October. The more pronounced downward trend in Swiss inflation increases the risk that the Swiss National Bank (SNB) could lower its policy rate by more than the two rate cuts of 25%, which we expect at the next meetings in December 2024 and March 2025.

Swiss consumer price inflation once again came in below expectations, easing to 0.6% in October from 0.8% in September, moving further towards the lower end of the SNB’s inflation target of 0% to 2%. A further fall in goods prices and a slower increase in services prices contributed to the lower-than-expected inflation rate. Import prices again fell more sharply than in the previous month, with lower oil prices compared with a year ago contributing to the decline, and a stronger Swiss franc probably also playing a role. 

Foreign goods and services were not the only factors contributing to lower inflation. The rise in domestic prices also slowed to 1.8% year on year, after remaining steady at 2% for the previous six months. All in all, the October inflation reading points to a more pronounced downward pressure on Swiss inflation. Economic activity does not point to a pickup in inflationary pressures either. Early indicators for October were rather mixed. The KOF leading indicator dropped significantly, while purchasing managers’ indices showed some improvement (mainly driven by an expansion in the services sector), whereas manufacturing activity continued to stagnate. 

The lower inflation reading increases the risk that the SNB could lower its policy rate by more than the two 25-basis point rate cuts that we expect in December 2024 and March 2025. We would also not rule out the possibility of renewed interventions in foreign exchange markets should the Swiss franc face further appreciation pressure, in order to prevent Swiss inflation from falling too low.

What does this mean for investors?

As German policymakers’ stress levels are rising by the minute, anything from snap elections to a major policy push is possible. It would be quite ironic to see Germany become the real wild card in a week of US elections and China policy meetings, yet the wait for the behemoths elsewhere in the world may give investors some time to check on their DAX exposure. The DAX German index – one of our favourites in Europe – is often misperceived and not appreciated for the performance it has delivered in past years, but especially year to date. It may be worthwhile to ponder on this, as policymakers may help to remind everyone of German stocks in the days ahead.