After a low on 30 September 1999, the German Nemax All Share had increased 196.6% by 23 March 2000. ...
After a low on 30 September 1999, the German Nemax All Share had increased 196.6% by 23 March 2000. Parallel to this, the Blue Chip Index Nemax 50 rose by 141.8% over the same period. We consider this drastic increase as exaggerated.
While the steep fall at the end of September can still be termed an overreaction to placement problems, we are now witnessing a boom driven by high liquidity which is not justified by fundamentals. The factor which will ultimately trigger a correction is not in sight just yet, but signs shows a relatively clear need for correction.
The only real argument against a correction is the currently high liquidity. Some mutual funds are more concerned with investing the current cash flow of retail investors as fast as possible than with worrying about the plausibility of the current valuation levels. Another phenomenon is that analysts frequently upgrade their price targets on the weak grounds that the peer group's higher valuation is unjustified. This cannot raise the fair value of a company, as neither its prospects nor its equity story has changed. We see the need for a correction of over 25%.
In the event of a strong correction investors should not necessarily take refuge in highly capitalised stocks.
Fund flows are a key factor in assessing the overall situation of the Neuer Markt. The inflow of funds in December 1999 and January 2000 to German and Luxembourgeois funds able to invest in the Neuer Markt (source: BVI) reveal a split pattern. In January, direct Neuer Markt funds mainly registered an outflow of funds.
On the other hand, technology and bio-technology funds reported particularly strong inflows. Overall, there is a positive balance of more than E2bn. This can be attributed not least to three new, large funds, which together collected more than E1bn. A comparison between January's investment requirement of over E2bn and December's of almost E400m shows the pressure on liquidity. A fund manager has two alternatives: he can either invest the money in the market, thus driving share prices further, or keep it in the till and miss out on the rapidly accelerating index.
The Neuer Markt's monthly turnover in January (E10.7bn, source: Deutsche Borse) is interesting in this context. If one assumes that only E600m of the E0.92bn flowed to the Neuer Markt, the Nemax's continuous increase is understandable. A number of foreign investors were not included. But it can be assumed many new funds were established in growth segments at the beginning of the year.
We believe the high issuing level will claim a major portion of the liquidity that has built up in the market, curbing the rise in share prices. We estimate the issue amount at the Neuer Markt will grow from E7.03bn in 1999 to E8.5bn this year.
Andrew Lockhart and Rainer Gerdau, analysts at Dresdner Kleinwort Benson Research
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