The Federal Reserve is expected to provide guidance regarding QE tapering, amid concerns vis-à-vis China’s property debt market
Equity market volatility increased, as investors’ risk appetite was affected by i) growing concerns over the slowdown in Chinese growth, amplified by the contagion threat of an Evergrande Group’s possible default; and ii) expectations that major central banks (Fed, BoE) will likely provide additional details regarding the reduction of pandemic-related stimulus.
The Federal Reserve is nearing the time when some of its stimulus ($120 bn purchases per month) can be withdrawn without undermining the recovery. The statement could hint for an announcement for the start of tapering in November. Moreover, interest rate forecasts by the Fed could edge modestly higher (1 or 2 hikes) over the 2022/2023 period relative to three months ago.
On Monday, the S&P500 declined by 1.7%, the EuroStoxx fell by 1.9%, and the German DAX by 2.3%. Regarding the DAX, on September 20th its constituents increased from 30 to 40, completing its largest reform in its 33-year history, adding more diversity and structural growth for a better representation of the German blue-chip segment.
The expansion is the final step in a series of changes implemented by a comprehensive process which started in the summer of 2020, following the collapse of Wirecard AG (the first DAX member to file for bankruptcy). To reduce the likelihood of another similar case, since December 2020, possible candidates must have a positive EBITDA in their two most recent annual financial statements.
As far as the newcomers are concerned, the selection was based on market capitalization, as the stock exchange turnover is removed as a ranking criterion, being replaced by a minimum level of liquidity (minimum trading volume over the last 12 months of either €1 bn at the Frankfurt Stock Exchange (FSE) or a turnover rate of 20%).
Following the change, Airbus SE became eligible, as although being the 5th largest company on the FSE, its trading turnover was relatively small. Apart from the airplane maker, the other companies selected are: Zalando, HelloFresh (Retail), Symrise, Brenntag (Chemicals), Porsche (Autos), Siemens Healthineers, Sartorius, Qiagen (Pharma & Healthcare) and Puma (Consumer), which are at the lower-end of the market cap spectrum compared to the existing 30 constituents of the index.
The aforementioned changes are expected to support DAX’s growth profile. According to our estimates, the 24-month forward P/E could increase by 10% to 13.7x, and the expected dividend yield by 0.4 pps to 3.4%.
Sector-wise, Industrials and Healthcare weights are expected to increase significantly (+3.3 pps and +2.1 pps, respectively). On the contrary, those of IT and Insurance are expected to decline (-1.7pps and -1.3pps, respectively). Nevertheless, the index will continue to generate c. 80% of its revenues abroad, a notable fact ahead of the forthcoming Federal elections.
Major shifts in the political landscape are likely (September 26th), with repercussions far beyond Germany. According to the latest opinion surveys, the Social Democratic Party (SPD) has seen an incredible surge over the past two months.