The German stock market has continued its record-breaking rally this year, rising by nearly 20%. Observers predict that global capital will continue to favor Germany for the time being, until uncertainties surrounding U.S. tariff policies are fully resolved and U.S. Treasury yields stabilize at lower levels.
On May 27, Park Sanghyun, a researcher at iM Securities, highlighted the drivers behind the German stock market's strength in his report, "Why the German Stock Market Is Performing Well." He cited the following factors: liquidity effects, stable inflation, a stable government bond market, strengthened fiscal stimulus policies centered on defense, an economic recovery trend, and the partial benefit from the "Sell USA" phenomenon.
Park noted, "Although the German economy is often referred to as the 'sick man of Europe,' the German stock market continues its record-breaking run regardless." The DAX, Germany's main stock index, fell by 12.3% in 2022, but then rose by 20.3% in 2023 and 18.8% in 2024. As of May 23, it had increased by 18.7% so far this year.
He first pointed to liquidity as a key driver of the German stock market's rise, stating, "Since the European Central Bank (ECB) began its rate-cutting cycle, interest rates have been lowered by 1.75 percentage points, and there is a high probability of further cuts. This represents an accommodative monetary policy stance, in contrast to the U.S. Federal Reserve, which has maintained a freeze after a 1 percentage point cut."
He also highlighted that, unlike in the United States?where recent tariff policy uncertainties have driven one-year forward expected inflation rates up to 7%?"Germany is maintaining a downward stabilization trend not only in consumer price inflation but also in expected inflation. In particular, natural gas prices, which surged following the outbreak of the Russia-Ukraine war, have also stabilized."
He added, "While the United States and Japan are exposed to government bond risks such as surging long-term interest rates, German government bond yields remain relatively stable compared to U.S. Treasury yields. Alongside monetary easing, the German government's plan to pursue a strong fiscal expansion policy, including increased defense spending, is also contributing to both the strength of the German stock market and a rebound in economic sentiment."
The economic recovery trend is also seen as supporting the stock market rally. Park explained, "The German economy has not fully emerged from its slump, but various indicators confirm that it is gradually recovering from the worst phase." If the current trend continues, there are projections that Germany's manufacturing Purchasing Managers' Index (PMI) could surpass the baseline of 50 in the third quarter, entering an expansion phase for the first time in about three years.
Finally, Park pointed to the "partial benefit from the Sell USA phenomenon," stating, "Due to tariff uncertainties, U.S. Treasury yields have surged (bond prices have fallen) and the dollar has weakened, leading global capital exiting the U.S. to seek a safe haven in Germany and other parts of Europe." He added, "The improved attractiveness of the German economy, as previously mentioned, and the strength of the euro are also contributing factors. In addition, Germany is relatively free from government debt risks."
As a result, there are forecasts that the relative strength of the German stock market will continue for the time being. Park predicted, "In the second half of the year, the trend may shift from 'Sell USA' to 'Buy USA.' However, until the uncertainties surrounding Trump's tariff policies are fully resolved and U.S. Treasury yields stabilize at lower levels, the preference for Germany and other European markets is likely to persist." He also expects that the possibility of further ECB rate cuts and the likelihood that European Union (EU) countries will accept President Trump's demands for increased defense spending at the June North Atlantic Treaty Organization (NATO) summit will further strengthen expectations for expanded fiscal spending. However, he cautioned, "The fact that the German stock market continues a strong rally compared to economic fundamentals is a source of concern."
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