Don’t be misled by German stock market rally

Germany may be in recession but German stocks seem to be doing just fine, with the Dax index recently taking out November 2021′s all-time high.

However, the German rally isn’t as impressive as it might appear. Yes, German stocks have done well recently – despite slipping last week, the Dax is up 13 per cent this year. However, the Dax’s long-term performance is a different matter. Whereas most European indices have made negligible gains since 2000′s dotcom-era highs, the Dax has more than doubled. This outperformance is an illusion, one explained by the fact the Dax, unlike most international indices, is a total return index that includes the reinvestment of all dividends.

In contrast, the little known Dax price index, which excludes dividends, is trading around levels (6,300) first reached in 2000. In price terms, the German index has basically gone nowhere over the last 23 years.

[ Germany slides into recession as consumer spending slows ]

If all indices were calculated like the Dax, their performance would look very different. The S&P 500 is trading around 4,100, but its total return counterpart is above 8,800. France’s Cac 40 is around 7,200, but the Cac 40 total return index is 21,700.

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Of course, dividends matter, and one could argue that total-return indices like the Dax give a more accurate picture of performance. That’s fine, but investors should be careful when comparing the performance of the German index to its international counterparts – you’re not comparing like with like.