German shares slump wipes 100 bln euros off DAX

Thu Aug 4, 2011 12:34pm EDT

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* German shares down 13.6 percent so far this week

* More than 100 bln euros wiped off DAX market cap

* Germany's long-term fundamentals remain strong

By Dominic Lau

LONDON, Aug 4 (Reuters) - Germany's stock market is succumbing to the euro zone sovereign debt crisis after months of resilience and is on track to suffer its biggest weekly drop since November 2008.

More than 100 billion euros ($143 billion), roughly the price tag of the second Greek bailout package, was wiped off the value of the DAX this week as a 13.6 percent drop pushed it into negative territory for the year.

That marks a new phase in a euro zone sovereign debt crisis that has already taken a heavy toll on Greek, Portuguese, Irish, Spanish, and Italian stocks but had, until recently, spared the equity market of Europe's biggest economy.

Economic indicators that pointed to slowing growth in the United States and elsewhere were the last straw for the exporter-heavy German stock market.

The pace of the DAX's decline will make short-term investors cautious of stepping in anytime soon, analysts said.

Robert Quinn, European strategist at Standard & Poor's equity research in London, recommended giving equities a clear berth for the moment and said there was no immediate trigger for a rebound in sight.

"Sentiment is so risk-off and we are still getting earnings downgrades," he said. "Banks have a fair amount of (their) 2011 earnings expectations stripped back, and so do industrial and material stocks."

However, Quinn and others view German equities as a better bet on a one-year perspective.

The underperformance in the DAX seen this week is unlikely to be sustained according such analysts because Germany has a higher potential growth rate than euro zone countries -- such as Italy -- that have yet to implement vital economic reforms.

"We have euro zone as underweight but within that we have Germany as our favourite country," said Michael O'Sullivan, head of global asset allocation at Credit Suisse's private bank.

Germany is expected to grow 3.4 percent this year, according to the latest Reuters economic poll, compared with forecasts of 2 percent for France and 0.9 percent for Italy.

Once the volatility that has shaken the market in recent sessions subsides, the more attractive valuation that the DAX now offers could tempt investors willing to buy Europe.

This week's sharp losses have pushed the DAX's 12-month forward price-to-earnings (P/E) ratio down to 10 from May's peak of 10.9, according to data from Thomson Reuters Datastream.

That is far closer to the P/E ratio of indices of countries at the heart of the crisis.

For example, Spain's IBEX 35 has a forward P/E of 9.6 while that of Italy's FTSE MIB comes in at 9. Even France, whose banks have a large exposure to Italy, has a stock market with a forward P/E of 9.3.

"I would definitely buy German equities on a one-year horizon ... Germany's growth profile is a lot stronger," said Quinn at Standard & Poor's. ($1 = 0.700 Euros) (Additional reporting by Blaise Robinson in Paris, editing by Swaha Pattanaik)

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