German Deception
As DAX Index marks its all-time high, German economy is in a deep crisis. What has caused this dichotomy?
Memorable days we are witnessing. New all-time highs in the DAX Index are being reached, exceeded and updated every day. Is everything perfect?
Apparently yes but let's dig deeper.
The DAX, which stands for Deutsche Aktienindex, takes into account the performance of the 40 largest companies listed on the regulated market of the Frankfurter Wertpapierbörse (FWB®, the Frankfurt Stock Exchange) meet certain minimum quality and profitability requirements. Component selection is based on free float market capitalization. DAX is calculated primarily as a performance Index and is therefore one of the few major country indices also takes dividend yields into account, thus fully reflecting the actual performance of an investment in the index portfolio. Basic criteria for the inclusion of companies in the DAX are:
existing listing on the regulated market of the FWB
continuous trading on Xetra®
minimum free float of 10%
registered or operational headquarters in Germany
timely publication of annual financial reports
certified semi-annual and quarterly
To be included in the DAX, a company that is not yet an index component must meet the following minimum FWB liquidity requirement: minimum order book volume in the past 12 months of €1 billion or turnover rate of 20%. A company that is already an index component must have a minimum FWB order book volume in the past 12 months of at least €0.8 billion or a turnover rate of 10%. In addition, to be eligible for the DAX, companies are not components at time of ranking must have positive EBITDA for the past two fiscal years. The selection of index constituents is based on free float market capitalization, and their composition is reviewed quarterly under Fast Exit and Fast Entry rules and semi-annually under Regular Exit and Regular Entry rules. Index weighting of a single stock is limited to 10%.
Here the first doubt arises: as we saw in the Annual Outlook, the first stock by capitalization is SAP SE with over 15.43%. If valuations of the other 39 stocks are within 10%, why was this company allowed to rise so much in the space of one year? (SAP went from just over 9% to over 15%, ed.).The second doubt or problem is related to legal operating headquarters in Germany.