Germany’s Defeating Stocks Head for Continued Gains in 2025

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(Bloomberg) — Germany’s biggest stocks have lagged their European peers this year as they have escaped the grip of a strong domestic economy. There is hope that the country’s hot trend could continue into 2025 amid an expected increase in government spending and a resurgence in Chinese demand.

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Boosted largely by the expansion of software giant SAP SE, the export-heavy DAX index has risen 22% this year, passing the 20,000-point mark for the first time this month. While it lagged the S&P 500’s 28% rally, it far outperformed European peers including a 7.4% gain in the UK’s FTSE 100 Index and a 1.6% drop in France’s CAC 40.

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Expectations of a stronger global economy and renewed demand from China fueled gains in stocks ranging from Adidas AG to cement company Heidelberg Materials AG. Those things are likely to remain in place through 2025, along with an expected increase in government spending after the February election.

“We are bullish on German stocks next year as the eurozone economy is likely to see some improvement,” said Susana Cruz, strategist at Panmure Liberum. He sees relief from low borrowing costs in the second half of the year, while noting that political environment risks will continue to weigh on the industrial sector.

Key to the DAX’s strength this year has been the strength of global gains in its largest companies. More than 80% of the sales of the 40 largest stocks on the Frankfurt list come from abroad, making them more exposed to global demand than domestic factors.

As the private banking team of Deutsche Bank AG put it in its vision for 2025, “the German economy is faltering, the German stock market is booming.”

Overseas, the US economy continues to be strong and Beijing has said it will adopt a “loose” monetary policy by 2025, already providing a boost to sectors exposed by China. President Xi Jinping’s Politburo vowed to implement economic reforms to support growth and emphasized the importance of boosting consumption, making it a top goal.

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At home, German Chancellor Olaf Scholz has started a process that should lead to snap elections in February. The next chancellor will have to secure the funds to cover the huge investments needed to transform Germany into a more advanced and climate-friendly economy – and pay for a military capable of defending the country. An increase in spending and a revival of capital may provide a further boost to the country’s stock.

Tech-Driven Rally

SAP alone contributed more than a third of the DAX rally in index points by 2024, according to Bloomberg calculations. Europe’s largest software company is up more than 70% this year as global demand for cloud-based artificial intelligence products grows.

Without this boost from Germany’s smaller megacap version of Wall Street’s “Magnificent Seven”, the DAX would have gained about 12%, in line with the rest of the region. The benchmark has also become more expensive than the broader European market, where it used to trade at a discount, based on forward earnings estimates.

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Other significant gainers this year include renewable energy company Siemens Energy AG, which gained more than 300% in demand for its grid technology. Rheinmetall AG more than doubled as the country’s tensions strengthened defense stocks, while lenders such as Deutsche Bank and Commerzbank AG added about 40%.

One company that stands out has been the auto sector, the worst performer in Europe this year, with German giants such as BMW AG and Volkswagen AG among the top losers, down more than 22% each.

“We remain cautious in the automotive sector given the continued disruption from the transition to EVs and the cost threat,” said Charlotte Ryland, head of investments at CCLA Investment Management.

The risk from political unrest, which is a key factor in the underperformance of French stocks this year, is unlikely, but should not be ignored, according to Jochen Stanzl, chief market analyst at CMC Markets. “Investors would do well to take a closer look,” especially with the German election fast approaching, Stanzl said.

The February vote is widely seen as a strong one on equity. Last month, a strategist for Citigroup Inc. Beata Manthey said that the possible reduction of corporate tax to 25% from 30% would increase the earnings per share by about 2% for the members of the DAX and 3% for the components of the Mid-cap MDAX Index.

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Not everyone is optimistic, and given the possibility of new US import tariffs.

“Income is definitely a challenge,” said Marija Veitmane, multi-commodity strategist at State Street Global Markets. “I would actually use the strong performance of the DAX as a selling opportunity.”

Strategists at Pictet Asset Management see far-reaching opportunities in Frankfurt’s blue-chip stocks.

“The potential is in small and medium-sized companies,” said Luca Paolini, chief strategist at Pictet. A sentiment-led recovery, if it comes, will benefit MDAX more, he said.

—With help from Michael Msika, Sagarika Jaisinghani, Jan-Patrick Barnert and Verena Sepp.

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