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Today, both Germany’s DAX and the US Dow Jones Industrial Index have traded at their highest ever levels, hwile the UK’s UK 100 failed to even reach its best level this week. So we’re asking, “how and why has this happened?
Both indices are made up of companies that are heavily influenced by the US dollar; the UK Index contains a large contingent of companies, estimated at around 70%, that make their money overseas, while the DAX holds a significant exporting base. Therefore any weakness shown in their domestic currencies has a converse translational effect on the indices.
However, to explain why the DAX is outperforming the UK Index , we need to look at the key difference between the indices: sector weightings.
The exporters that make up the majority of the DAX produce Manufactured Goods, unsurprising given the world-renowned nature of German mechanics, and Chemicals. Global brands such as Siemens (~10% weighting), Daimler (parent company of Mercedes, ~7%) and BMW (~3%) take up 20% of the index alone, while Chemical behemoths BASF and Bayer (~9%, ~8% respectively) make up almost another fifth.
On the other hand, the UK’s UK Index is significantly overweight in the Mining and Oil sectors. The former comprises 7% of the index while the two major Oilers, Shell and BP, take up a further 8.5% and 4.5% respectively. The two sectors combined therefore amount to a fifth of the index.
Therefore, the recent bout of weakness in Base Metals such as Copper and Iron Ore, alongside subdued Crude Oil prices as OPEC producers struggle to redress the current global oversupply, has severly impacted the UK 100 .
While the DAX enjoys translational FX benefits to take it to fresh highs, the UK Index is struggling to return to the all-time highs of two weeks ago as it is held to account by external commodity markets.
Unlike the other two indices, the Dow Jones is price-weighted. In other words, instead of being driven by the largest companies by size, the Dow is driven by companies whose shares are worth the most. This means that companies such as Goldman Sachs (~220c), 3M (~210c) and Boeing (~190c) have a much greater impact on the index’s fortunes than larger companies such as Apple (~145c), Johnson & Johnson (~130p) and Exxon Mobil (~80c).
Because of this, sector wide trends do not impact the Dow Jones as greatly as they would for the UK Index and DAX. Instead, general economic trends rule the roost. When the US economy is perceived as strong – as it currently is versus the other major developed economies of Europe, Japan and the UK – stock markets tend to perform strongly.
Therefore, there is no one set reason why the UK Index is underperforming against its German and American peers. Rather, an unfortunate combination of drivers – namely weak commodities and economic uncertainty – are weighing on the UK’s blue-chip index.
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Henry Croft, Research Analyst, 14 June
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