21/09/2020 - Markets: market opinion
"Taking account of governance criteria"
Debates regarding a reform of the DAX index arose after the Wirecard scandal arose and the company Delivery Hero was listed to the German stock index DAX. Dr. Jens Ehrhardt has been working with the DAX and many other international stock market indices for over 45 years and has his own opinion regarding this matter.
To what extent is the Dax a reflection of "the German economy"?
At first glance the “Deutsche Börse” could certainly increase the international relevance and sharpen the mirror on the German economy by increasing the DAX to 100 titles. At second glance, however, it quickly becomes clear that the shot may backfire. The lack of size and low tradability (liquidity) of many shares in the MDAX would be a no-go for large investors and this would make ETFs more expensive. In this respect, the 30 DAX stocks are already reasonable. A DAX 50 would probably still be a conceivable option. However, the MDAX would lose out on the relevance of this option and these stocks would be "taken away" from the MDAX. If you are looking for a broader index with more shares, there is the HDAX with 110 shares. It consists of DAX, MDAX and TecDAX. However, there is a reason why this index is not strongly focused.
The low weighting of innovative tech companies in the DAX is a general problem in Germany, but also in Europe. There are simply not enough relevant and large players. Unfortunately, the index cannot change this. We need a better start-up culture, more courageous start-up financing and a regulatory environment that promotes such companies.
Would it make sense to replace the performance dax in the prominent external presentation with the price dax? And do you share the criticism of the unusual format in international comparison?
This unusual format has been criticised by us for many decades because it distorts the comparisons with other indices. It compares apples and oranges and pretends that the dividends are tax-free. Deutsche Börse publishes the price DAX as a solution. This is only less prominent because market participants and the media are attached to their habits. However there are even more absurd constructions in index design as the US Dow Jones shows. It consists of only 30 stocks and is therefore far too small mirror for the US economy. Moreover, it is not weighted according to market capitalization, but in according with the share prices. No one would think of creating a stock market barometer like this today, where the weight of a share is reduced just because a stock split is carried out or where a small company is weighted higher just because its price is higher than that of a giant corporation. The Dow Jones is also not an index but an arithmetic average. Again investors and reporters are very traditional. For example, the German radio news regarding the stock market always use the Dow Jones although the S&P500 would be much more relevant.
What about the idea of introducing governance (corporate management) criteria as a condition for the index listing in the event of an index reform?
If you want the DAX, as the figurehead of the German economy, to rise in quality, then governance criteria should definitely be taken into account. These criteria are not arbitrary. In recent years a culture of governance has been established and with it extensive reporting on the subject. Every good fund manager considers these aspects. This is important from a risk perspective alone. The long-term success of a company stands and falls with sound corporate governance. It is not without reason that the sustainability topic, which is also abbreviated as ESG (Environment, Social, Governance), is gaining more and more importance. Some incidents in the German leading index could have been avoided if this aspect had been taken more seriously. Do not only think of Wirecard, but also of the automotive and banking industries.
Do you consider profits to be a precondition for a listing in the Dax index?
This is an honorable approach but many successful companies have shown that it is possible to pursue a different strategy. Growth and technology companies in particular can make losses for years. The most prominent example is Amazon. The focus here has always been on market share and size, not on short-term profit maximization. Under certain circumstances such a huge company would be ruled out. If you want to mirror the economy the mirror image would be distorted by excluding such companies.
Should DAX companies in any case have their headquarters in Germany - for example Linde, which moved its headquarters to Dublin after the merger with Praxair?
We have just explained that there is only a limited number of large companies in Germany. In this respect of Linde, which after all still has a large part of its business and a long history in Germany, we should turn a blind eye and not be too strict. On the other hand companies are now also listed that have almost no German business at all, but which are nonetheless managed from Germany. This is a difficult decision because internationally operating groups do only a small part of their business in Germany, because the German domestic market is comparatively small compared to the world market. This is a question where a sense of proportion should be applied.
What other changes of the Dax rules and regulations do you consider to be necessary?
The fact that Airbus, with a market capitalization of almost 60 billion euros, is listed in the MDAX but not in the DAX, could be reconsidered. The background is that the headquarters are located in Toulouse. In my opinion, however, this decision is not entirely consistent.
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