German strength propels Dax near record Until the Cyprus crisis erupted this week, it looked like third time lucky for the Dax share price index. Germany's benchmark share index last week broke through the 8,000 mark - a level where it has stalled twice before, during the dotcom boom and on the eve of the financial crisis. It broke through 8,000 again on Wednesday. Events in Cyprus may now delay the moment when the Dax breaks past its all-time high of 8,106 in 2007. But they have not dashed confidence that the rally has further to run. "We think the Dax will be at 9,000, rather than 8,000, at the end of the year, if specific risks as seen in Cyprus are managed appropriately," says Stefan Keitel, global chief investment officer at Credit Suisse. The Dax's resurgence is flattered because it is a performance-based measure that includes total returns through dividends. So 8,000 now does not have the same value as 13 or even five years ago. Using an alternate measure that strips out those returns and measures only share prices, the index remains favourably valued compared with previous peaks. At about 4,300 it is 1,000 points lower than in 2007 and almost 2,000 points below its peak 13 years ago, according to Roger Peeters of Close Brothers Seydler in Frankfurt. Yet the Dax's recent rise reflects the strength of Germany's corporate sector and economy relative to the rest of Europe. Seven Dax companies, including BMW, Henkel and Volkswagen posted record profits in 2012, helped by the growing share of business conducted outside of the struggling eurozone. The US and Asia "are two important regions for German exports, so that is helping the German market," says Stefan Rondorf, a capital markets strategist at Allianz Global Investors in Frankfurt. David Milleker, chief economist at Union Investment in Frankfurt, says: "Germany is an economy without a domestic keel, it is torn left and right by the global cycle . . . If the global cycle is OK, Germany is doing well. If the global cycle is bad, Germany does extremely badly. That should continue to provide support for the Dax. Investors are getting more and more confident that the global economy is not going to have a big shock. Germany is seen as a good play on the cycle," says Mislav Matejka, European equity strategist at JPMorgan But the Dax has also benefited from central bank policies that have boosted liquidity and investor risk appetites, and Mr Keitel says macroeconomic growth is having "much less effect than one would think." "The main driving force is the fact that central banks, including the European Central Bank, are pursuing aggressive liquidity policies, coupled with a lack of other investment opportunities," he says. German government bond yields are negative in real terms, while reforms to German open-ended property funds have also removed them as an opportunity for many investors. There has been a lot of money on the sidelines that is finding its way into the Dax. Mario Draghi, ECB president, has, meanwhile, eased the risk of a disruptive eurozone break-up by pledging last July to do "whatever it takes" to preserve its integrity. But arguably more important are actions by the US Federal Reserve. Its successive rounds of quantitative easing have led to "a strong co-movement up in valuations on a global scale," says Mr Milleker. German and US price-to-earnings ratios are strongly correlated, he notes. The US S&P 500 index is also approaching an all-time high. Support from "global QE" is expected to continue to support German shares. The Bank of Japan, under its new leadership, is expected to become more aggressive in its attempts to drag the country out of deflation, while the Fed's commitment to asset purchases is open-ended - and deliberately focused at driving up share prices. Mr Peeters notes that, before the Cyprus bailout, the day in recent weeks when Germans stock were most under pressure was when Fed meeting minutes suggested a possible end to QE. That, he argues, shows the way the German market is correlated. "When the central banks stop being so expansive, markets will be under pressure," he says. What about the continued attractiveness of the Dax relative to other European opportunities? Some economic indicators from the eurozone periphery could start to look more positive later this year, says Allianz's Mr Rondorf. In such a "catch-up" scenario, German stocks could underperform, he says. But so far there are scant signs of investors deserting German stocks to switch into eurozone periphery shares. Mr Matejka says: "At the beginning of the year, we were expecting that and it started to happen. Italian politics got in the way, turning out to be more messy than anticipated. People feel they should not abandon good-quality, global-cycle German stocks.