(Bloomberg) -- Investors celebrating Germany’s DAX Index rising to an all-time high may want to have a look at the history books.
In the last 20 years, each time the benchmark has set a record, it’s been followed by a drop in the months and years after. From the peaks of 2000, 2007, 2015 and 2018 the gauge fell on average 45% to its trough, with the steepest being a 73% decline following the bursting of the new economy bubble at the beginning of the century.
“Yes, the market is ready for a correction,” said Daniel Kerbach, chief investment officer at Merck Finck Privatbankiers AG. “We had a long and steep run, volatility is extremely low and valuations are stretched,” he says.
Predicting a stark decline is always difficult, especially if it is triggered by a crisis or black swan event, Kerbach says.
Still a correction with a magnitude between 5% and 15% can be considered normal and is quite possible, according to DWS Investment GmbH portfolio manager Christoph Ohme, who helps manage its 5.6 billion-euro ($6.2 billion) Germany fund.
“We are currently lacking a wider cyclical recovery, that makes a correction quite possible,” Ohme says.
To be sure, this is the first time the DAX has reached a record while 10-year bund yields are negative. This means German equities are still very attractive relative to the bond market, and could limit any downside for the benchmark for now as asset allocations are scrambling to get returns.
“In the long run, the environment for stocks remains positive as yields are low and the hard political risk has abated,” Ohme says.
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