The German election re-sult has added to the un-certainty on the DAX created by last month's global financial crisis. Chancellor Gerhard Schröder's Red-Green coalition has been strong on policy but weak on detail to date.
Of particular concern to analysts is the proposed root and branch reform of the company taxation system. Tomas Teetz, chief German analyst at Trinkaus in Frankfurt, believes that proposals to finance lower bands for low-income families from higher corporation tax could have a serious effect on the German market in the immediate future. It is not yet obvious where all tax advantages cuts will come, but some are predictable. To begin with utilities are likely to suffer."
Teetz points out that plans to reform the manner in which companies write down assets in their balance sheets will affect banks and insurance companies, limiting their options for building hidden reserves. Proposals are also afoot on taxation of hidden reserves, which could also hit mergers and acquisitions.
Add to these the Green's aim to reform asset taxation in Germany, and Teetz believes the next month or so could see a very quiet German equity market.
"Although international events remain the major in-fluence, there could well be more risk on the DAX than other European markets. Be-cause of domestic uncertainty, the global shake-out has made even German in-vestors uneasy," adds Teetz.
Mike Young, head of European strategy at Goldman Sachs is in agreement. He points out significant risk in any stock in the DAX. "We are seeing lower growth in traditionally strong areas such as car manufacturing, chemicals and engineering. The banks have also been ex-posed through their eastern European instruments. Nevertheless we have seen growth of 15-20% this year and high single digit figures are expected next year."
There is another side to the new government however, and that is job creation programmes and lower personal taxation. "If we see spending rising and unemployment falling, then there are growth sensitive areas which will doubtless recover quickly," maintains Young.
Picking winners is difficult at the moment, maintains Young, but new entrants into the cellular telecommunications sector probably have an advantage of Deutsche Telekom which looks vulnerable, due to regulatory orders. He expects the largest gains to be made by stocks in the layer below the DAX, which cater more for local rather than international investors.
Lisa Salojarvi at Dresdner RCM in London sees the fixed interest market settling down towards the end of the year, following the volatile activity of the last month.
"Last month we saw risk averse investors moving into bunds, and the yields fell to low levels. But more recently the trend reversed and generally yields are back above 4%, with the 10-year bond going as high as 4.2%. Those are the levels which I would anticipate being maintained until the year end."
There remains the fear of a German interest rate cut at the end of the year, however, while the Bundesbank is still able to act. "Although all the sounds coming from the Bundesbank indicate that there will be no cut, one should never say never," says Salojarvi. The fact remains that with peripheral rates coming down in Europe that should mean a general lowering of the average rate across Europe through convergence without any German action.
"One thing which could prompt a reduction in interest rates would, of course, be a stronger deutschmark. Currently it is not a problem, but were it to rise to say 1.50 against the dollar then a fall could be triggered," she be-lieves.
Salojarvi predicts a small rally in the bonds market, but a steady return to equities as the year progresses. "Central bankers are certainly not talking as if they believe a recession is around the corner, at least not in Europe. The long-term prospects suggest bunds will not be the place to be as yields fall to low levels towards the end of next year." Kevin Hall"