By Christopher Vass, senior product manager
Germany’s stock market – perhaps like the country itself - is sometimes mischaracterised as solid and reliable, and perhaps overly dependent on industrial heavyweights. But as we highlighted in a post earlier this year, German stock market performance has been more than solid since COVID – in fact the second best performing Developed European market (as measured by FTSE GEIS) since the recovery began in late March. And that growth is in part due to a greater diversity than the stereotype of blue-chip industrial behemoths.
Source: FTSE Russell as of 13 August 2020 in USD. Past performance is no guarantee of future performance.
As seen by the table above, the number of constituents has increased significantly and mainly in the mid-cap segment. The weight of Germany in FTSE Developed All Cap has also increased from below 10% to close to 15% during the same time-period.
The other three major equity markets, shown below, haven't seen the same increase in constituents (both relative and in absolute numbers). The UK for example has fewer constituents in FTSE Developed Europe today then it did 15yrs ago.
Source: FTSE Russell as of 13 August 2020 in USD. Past performance is no guarantee of future performance.
The question worth answering, is if it historically has been beneficial to expand beyond large caps in Germany?
Source: FTSE Russell as of 13 August 2020 in USD. Past performance is no guarantee of future performance.
As the chart shows above the, FTSE Germany Small Cap and FTSE Germany Mid Cap has outperformed FTSE Germany Large Cap. Another point worth highlighting is that the outperformance has been achieved at a lower realized volatility. Realized standard deviation using daily returns tells us that FTSE Germany Small Cap had a standard deviation of 20.7% vs. 21.1% for FTSE Germany Large Cap.
To better understand the differences in performance, we have put together the tables below that illustrate the five largest Subsectors within each market cap index.
Source: FTSE Russell as of 13 August 2020 in USD. Past performance is no guarantee of future performance.
As there are more constituents in the Mid and Small cap Indices, they are more diversified across the different Industries. In the Large Cap Index, single names can dominate a single Industry. For example, how SAP represents 84% of the Large Cap Technology Industry. The Mid and Small Caps also provide exposure to New Economy Subsectors such as Semiconductors, E-commerce and Biotechnology.
A broader Germany equity exposure across the three market cap segments has historically benefited investors with better risk-adjusted returns as it has provided exposure to segments of the market not represented by Large Cap stocks.
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