Germany is in economic crisis – but the DAX is on record: Why is the German stock market outperforming the Swiss SMI?

“The German economy has entered a recession,” says Sergio Rossi (52), professor of macroeconomics and monetary policy at the University of Freiburg. The German economy is shrinking. Last year, Germany’s gross domestic product (GDP) fell by 0.3 percent. GDP in Switzerland increased by 1.3 percent over the same period.

The reason for this is the chain of events since Corona: After the virus, Germany struggled with rising prices due to the war in Ukraine. Many goods imported by Germany suddenly became expensive. In addition, the European Central Bank gradually increased the policy rate, which is currently 4.5 percent. This has an impact on food prices and the real estate market. Finally, the pressure on consumers is increasing, many things are becoming more expensive and many German companies have been forced to tighten their belts in recent months. There were mass layoffs.

“Financial markets often react adversely to the so-called real economy,” says Rossi. If a country’s economic situation is not good, the stock market may rise. Because then some players in the stock market feel huge profits: more dividends and more distributions. They buy too.

The hope that interest rates will fall is currently fueling all markets. Money would become cheaper again, purchasing power would increase again, and profit distributions would also increase. US indices such as Dow Jones, Nasdaq technology index and S&P 500 reach record levels from time to time.

DAX has been leading since the beginning of the year. The stock index of the 40 largest German companies rose by around 8 percent in the last three months. The stock index of Switzerland’s 20 largest companies (SMI) increased by around 4.5 percent in the same period.

Heavyweights such as Nestlé, Roche and Novartis are traded on the Swiss stock exchange. These companies are less dependent on interest rates than others. DAX, on the other hand, is a performance index, meaning it takes dividends into account. This can accumulate over time.

But Rossi says things don’t have to go on like this anymore. The situation may reverse again if there are large sales in the German stock market due to the bad economic situation. Because then companies would start to make losses and shareholders would be saved.

Yes. “Various financial institutions buy stocks and shares of companies when they announce layoffs because they believe this will increase overall profits,” says Rossi. However, companies that buy back their shares for financial reasons also increase their assets in the short term, and with it, stock market prices also rise. “Share prices are therefore strongly linked to the performance of the respective companies.”