When investors think of stability among Eurozone economies and exchange traded funds, thoughts often drift to Germany, the region’s largest economy, and ETFs such as the iShares MSCI Germany ETF (NYSEArca: EWG).
Currently, Germany’s benchmark DAX Index is nearing an important technical juncture.
The DAX, or Deutscher Aktienindex, is comprised of 30 largest and most liquid companies on the German equities market. The companies make up about 80% of Germany’s stock market capitalization.
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The index is heavy on industrial, materials, financial services and consumer discretionary stocks, giving German stocks plenty of leverage to the weak euro theme. Germany is the Eurozone’s largest economy and its top exporter.
According to JPMorgan Asset Management, the European stock market has gotten too cheap to resist, with valuations on the MSCI Europe ex-UK Index and the FTSE All-Shares Index at attractive valuations when their price-to-earnings ratios are adjusted for inflation over the past 10 years, reports Aleksandra Gjorgievska for Bloomberg.[related_stories]
Adjusted for inflation, the MSCI Europe ex-UK Index traded at 15 times earnings at the end of June, compared to its long-term average of 19.4 since the 1980s. The FTSE All-Share Index was trading at 12.3 times earnings, compared to a mean of 17.
“The juncture is the convergence of 2 important trendlines (on a linear scale). The first is an Up trendline stemming from the 2011 lows in the DAX and connecting the 2012, October 2014 and August-October lows. The DAX broke below the trendline early in the year and, other than the temporary spike back above it in April, it has struggled to reclaim it since. From a technical perspective, this trendline is seemingly the barrier that has kept the German DAX in check. The index is once again bumping the underside of the trendline presently, in what looks to be a key test for the DAX,” according to See It Market.
Some investors may be deterred by the ongoing flood of Syrian refugees entering Germany. While observers previously argued that the influx of refugees may help reverse Germany’s aging demographics, augment the country’s dwindling labor pool and stimulate infrastructure spending, Centre for European Economic Research President Clemens Fuest argues that Germany will have to pay a high cost and see little return on investment.
“Making the test even more significant is the proximity of the post-2015 Down trendline connecting the April and November-December highs in the DAX. This trendline is nearly converging with the post-2011 Up trendline at the moment in what could be the most significant charting juncture for the German DAX index since the post-February rally began,” adds See It Market.
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iShares MSCI Germany ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.