Dax under pressure from resurgent euro

Germany's Dax was the worst-performing major eurozone equity market on Tuesday, with export-orientated companies bearing the brunt of an appreciating single currency.

The Dax index, which tracks 30 leading German stocks, fell 1.7 per cent on Tuesday, led by the likes of Daimler, Volkswagen and BMW. The correction in the Germany benchmark, which still remains 17 per cent higher so far this year, and is only eclipsed in terms of performance by Italy's FTSE MIB index, reflects the recent resurgence of the euro.

The rallying currency and weakness in share prices is seen as representing a challenge for policy makers, as the European Central Bank's quantitative easing programme seeks to push asset prices higher and power a sustainable recovery in the economy.

The recent pullback in the Dax leaves it shy of registering a decline of 10 per cent from its record close set in April, satisfying the definition of a normal price correction within a long-term bull market trend. Strong fund inflows into the Dax last week, were seen as an indication of recovering investor sentiment as the market rebounded more than 3 per cent from the middle of last week.

However, the resumption of selling this week comes as the euro rose 0.7 per cent on Tuesday, and has climbed almost 6 per cent since mid-April. A weaker currency boosts export growth and the value of foreign earnings for a number of large German companies.

"The euro helps a significant amount, but it's not the only fundamental driver," said Karen Olney, head of European thematic research at UBS. "What is as (or more) important is that this is a consumption-based recovery with Germany also importing from its eurozone neighbours."

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"The cyclical exposure that we're moving into now is maybe a little more domestic, less reliant on currency, like media [stocks]," he said.

In a report last week, analysts at Societe Generale suggested "switching out of Germany" - which they said had limited upside - into French and Italian markets "where the drive for reform is gaining momentum".

Other investors suggested that earnings growth will be a future driver of performance for European equities.

"Valuations have clearly rerated in previous years, so they are looking more expensive than they were previously" said Louise Kernohan, fund manager at Aberdeen Asset Management. "But we are starting to see real signs of earnings growth coming through."

She added that future performance may fail to match the robust performance of European indices seen up until last month. "European equities, especially the DAX, have been exceptionally strong year-to-date," she said. "It's very optimistic to think the second half will follow as strong a trend as the first half."

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