By Tommy Stubbington
Global equity markets are in turmoil, and Germany is feeling the
strain.
Frankfurt's DAX index on Friday slumped more than 2% to a
one-year low. The benchmark is down more than 12% since its
all-time high in late June, placing the index into correction
territory--a phrase often used to describe a drop of anywhere from
10% to 20% from a recent peak.
Those declines have come as stocks around the world swoon, but
Germany--considered the engine room of the eurozone economy--has
been hit especially hard. The pan-European Stoxx 600 is down 8.5%
from its 2014 peak, while the S&P 500 has lost 4.5%.
That is partly because the engine has begun to sputter. Data on
Thursday showing a drop in exports in August followed dismal
readings for manufacturing and factory output earlier in the week,
suggesting growth has stagnated or even that the country could
enter a mild recession.
But the DAX also finds itself in the firing line because it is
dominated by so-called cyclical stocks--industrial firms and
exporters that are particularly sensitive to growth expectations in
Germany and abroad.
Blue chip names including car maker Volkswagen AG, chemical
company BASF SE, and building materials firm HeidelbergCement AG
have all slid more than 20% in the past three months.
"The reassessment of global growth prospects has damaged the
more cyclical parts of the market, such as the DAX," said Ian
Scott, head of global equity strategy at Barclays.
"We have seen something of an exit from Europe, particularly by
U.S.-based investors, since the summer. I suspect that is weighing
particularly heavily on Germany," he added. Fund managers are also
worried about the conflict in Ukraine, which has sparked Western
sanctions against Moscow--due to Germany's close trade and energy
links with Russia.
Despite a midyear turnaround, U.S. investors poured a net
EUR4.12 billion ($5.24 billion) into Europe-focused equity funds
from the start of the year until the end of August, according to
data from Lipper, a unit of Thomson Reuters. But more than EUR800
million flowed out of funds concentrating on Germany.
Neil Wilkinson, who manages a European equity fund at Royal
London Asset Management, which oversees GBP77 billion ($124.5
billion) of assets, said he has steered clear of cyclical stocks in
recent months. He reduced his holding in BASF a few weeks ago amid
worries about the state of the global economy.
"It is a classic proxy for the chemicals sector. Economic
indicators suggest it is going to have a difficult final
quarter."
Mr. Wilkinson has also upped his cash holdings to prepare for a
rocky market. He currently has over 4% of his portfolio in cash,
compared with a typical level of around 1%.
"The selling is pretty indiscriminate, and today it looks like
there is no place to hide. There are no prizes for bravery in this
market."
Write to Tommy Stubbington at tommy.stubbington@wsj.com
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