DAX Index: an Asian Perspective

• Dr. Jan-Carl Plagge, Head of Applied Research
  

The iconic DAX® Index has tracked the performance of Germany’s corporate champions since 1988. Its 30 components include globally renowned brands that have helped make Germany an export powerhouse.

In the aftermath of the 2008 global financial crisis, Germany has been the economic locomotive of the euro area, thanks to a combination of steady domestic consumption, rising exports and increased manufacturing efficiency.

Since 2009, Germany’s GDP per capita has grown 24%, double the pace of the euro area (Chart 1).

The equity market has reflected this relative performance too. DAX has gained 154% since 2009, including dividends, beating the 102% total return of the EURO STOXX 50® Index.

Exploiting German returns with added benefits

A new paper by STOXX Ltd.¹ approaches DAX from a different angle by adding an Asian perspective. It looks at how Asia-based investors in the German index can capture its performance while profiting from additional benefits presented by the benchmark.

One such advantage is the leveraged geographic exposure that investors access through the single-country DAX. Almost 29% of DAX revenues are derived at home, according to the STOXX TRU®methodology, which calculates economic exposure based on the geographic origin of company revenues. Developed Europe excluding Germany accounts for 20% of DAX-listed companies’ revenues, while a combined 25% comes from the US and Canada.

This means investors are gaining significant exposure to the German economy but also to a geographically diversified stream of revenues.

DAX is also well diversified in terms of business sectors. An analysis of sector constituency in DAX and five Asian benchmarks shows the ten industries in the Industry Classification Benchmark (ICB) carry a more equally weighted presence in the German index. The median weight in DAX for all industries is 8.6%, the research paper shows, compared with an average of 5.0% for the FTSE TWSE Taiwan 50, the Hang Seng Index in Hong Kong, Japan’s TOPIX, Singapore’s Straits Times Index and the FTSE China A50.

With the exception of Oil & Gas, all industries are represented in DAX, an uncommon feature in Asian indices.

Lastly, the DAX index exhibits very low correlations to Asian benchmarks, which makes it an ideal investment for diversification purposes (Table 1).

A deep and liquid market ideal for hedging

Furthermore, as one of the developed world’s most liquid equity markets, DAX constituents are easy to trade, bringing down costs and volatility.

DAX itself is a highly liquid index in terms of derivatives contracts built around it. In the first half of 2017 alone, over 22 million options and futures contracts based on DAX were traded. This means that DAX-based products can be hedged at extremely attractive costs.

DAX, representing approximately 75% of Germany’s total stock market capitalization, not only offers exposure to Europe’s growth engine. For investors in Asia, it opens the door to uncorrelated and complementary market returns.

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¹ ‘Investing in Germany Using DAX® – An Asian Perspective,’ STOXX, Jul. 27, 2017