The Dax recorded rarely seen increases on Wednesday.
(Photo: AP)
Anyone who is involved in the stock markets and who is possibly thinking about buying more after the brief interim rally on Wednesday should be able to withstand price losses of far more than the previous 20 percent, as we have seen in the Dax. Three scenarios should help to classify the further development.
The best case: quick end to the war through mediation
In the best-case scenario, a mediator such as China or Turkey will manage to persuade Russia to end the war in the coming days. Ukraine may have to give up Crimea for good and make further concessions so that Russia’s head of state, Vladimir Putin, comes out of the war face-saving.
Given the Western alliance’s determination to isolate Russia with sanctions and given the fact that Putin has so far encountered major military difficulties in Ukraine, contrary to expectations, this peace scenario is at least not out of the question.
In that case, the stock exchanges would probably start a relief rally. The Dax could quickly gain 1,000 points, and the global economy could continue where it stopped before the war began. Renewed record profits by companies in view of many catch-up effects even make new highs possible. Anyone speculating on this should get in now.
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The more likely case: prolonged war
However, the scenario of a longer-lasting war is more likely. In view of rapidly increasing energy prices, production bottlenecks and delivery problems due to the withdrawal of Western companies from Russia, large parts of the economy would be affected.
A global economy that weakens as a result and even leads to a recession would primarily affect the many German companies with strong exports and thus the Dax in particular. The previous price losses do not reflect this scenario sufficiently.
The extreme case: the war spreads
In extreme cases, the war escalates, for example when Putin feels cornered by the sanctions and the threat of his country’s bankruptcy. Then he could stage an incident in the border area with a NATO state that would lead to a military conflict. In that case, all of Europe has a much bigger problem than falling stock prices.
Losses of well over 50 percent are likely. In the past, the Dax fell more sharply during much smaller crises: between 2000 and 2003 it was 75 percent.
Which offers investors orientation
Orientation is provided by a sober balance sheet figure: the price-to-book ratio (PBV). It expresses how highly companies are valued in terms of their equity and is calculated as all of the company’s assets less their liabilities.
The number is so important because it gave a good entry signal in past major crises, when all Dax companies were only rated with an average P/B of one. This means that investors paid as little for the Dax companies as they reported in terms of book value.
This was the case with the Iraq war that began in 2003 as a result of the terrorist attacks on the USA. At that time, the Dax fell to 2200 points. The next time it slipped to 3666 points in the financial crisis in 2009 and the last time in the corona crash in 2020 to 8200 points. The stock market decline always ended when the companies, converted into Dax points, were only valued on the stock exchange with their simple substance.
A Dax of 8366 points is currently calculated for this. That is another third below the current level. This number does not give a perfect entry signal, especially not for the third extreme scenario. After all, prices always result from supply and demand. But some orientation is worth something in uncertain times like now.
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