This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
Most of my clients here at Accendo Markets are UK investors, focused on investing in FTSE stocks. They know and love UK’s household brands and their trading preferences lie onshore. Amongst persistent Brexit uncertainty, many investors are looking to diversify their portfolios. Lately, I’ve been receiving questions about trading overseas securities. Namely, the Germany’s DAX.
The German index can be interesting to investors who are looking to gain exposure to European automakers and industrials. Companies like BMW and Siemens are UK household names. Many investors, however, need support in navigating a foreign market. An educational overview is long overdue.
So, what is the DAX and how do you trade it? DAX stands for Deutsche AktienindeX (which literally means “German Stock Index”). It is an index of 30 of the biggest companies on the Frankfurt Stock Exchange by market capitalisation. Because it is capitalisation-weighted, its admission criteria are broadly similar to that of the UK’s FTSE 100 or the US’s S&P 500.
Just like other indices, you cannot buy or sell the DAX directly like a stock or a currency. Instead, investors can trade DAX derivatives. This includes futures or options which mirror the up and down movement of the index. The main platform for DAX futures is the Eurex Exchange in Germany.
Can you still trade the DAX if you don’t have a German broker? No problem. The answer is CFDs. On Accendo Markets trading platform, our clients have access to trading DAX CFDs as well all major DAX constituents.
What’s even better, CFDs are traded using leverage, meaning you only need to put down a 20% deposit to gain full exposure. And the new European regulations automatically protect all CFD investors with a built-in safety buffer.
To limit your losses, you get automatically closed out if the value of your DAX position falls by more than 10%. And in the unlikely case where the DAX suddenly falls by more 10%, you can never lose more than the value of your initial deposit.
The German market has been struggling lately, with the DAX -20% from 2018 highs. To become a part of the DAX, a company must operate in Germany. This means that the DAX can serve as a proxy for the German economy. The latter is slowing down (+1.1% YoY, slowest pace since the 2013 contraction) and German consumer confidence is at 1.5 year lows.
What does the future look like for German equities? Is there an opportunity for London investors to benefit from the market sell-off in Germany? Much of the outlook depends on the outcome of US-EU trade negotiations. German market is deeply senstitive to the threat of US automotive tariffs. All German automakers were deep in the red since end of 2017. VW is -13%, BMW -16% and Daimler -30%. That said, the worst may be behind them and all three are 5-13% off their 2018 lows.
Do you think US President Trump would follow on his threat to impose protectionist tariffs on German cars? Or will Angela Merkel’s charm offensive succeed in shielding German manufacturers from new trade restrictions? The US-China trade negotiations seem to be going well, could Germany and the Eurozone get a boost from a similar US-EU trade truce?
DAX is already over 6% off its worst 2018 levels, bouncing off a 5-year rising support. With the trade optimism permeating the markets, could we see a revisit of 2018 lows to revisit the index’s 13600 record highs? A full retrace would imply an almost 25% upside for DAX investors.
If you feel like there is a trading opportunity here, Accendo Markets can help you take advantage using our trading platform and our award-winning research service.
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Mark Crouch, Trader, 11 January 2019
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance.Prepared by Michael van Dulken, Head of Research