Germany’s stock market needs deeper change

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That there has been little argument over expanding Germany’s Dax 30 index of blue-chip stocks to a Dax 40 reflects a fundamental problem with the reform. Including 10 more companies makes the index more diverse for investors and provides a showcase for more of the country’s companies. Yet the lack of controversy reflects a lack of ambition: deeper change is ultimately needed to create an equity market fit for Europe’s largest economy.

The expansion, from later this month, follows a consultation by the Dax operator, Deutsche Börse Group, on how to improve stock markets after the Wirecard accounting fraud. As well as increasing Frankfurt’s appeal as a listing destination for fast growing technology companies, there are other reasons to revamp Germany’s equities scene: the eurozone needs deeper financial markets to replace the City of London after Brexit. Equities need a particular boost given the bloc’s dependence on debt financing.

Germany is no laggard in innovation. Its industrial behemoths are among the world’s biggest investors in research and development, its universities and research institutes count armfuls of patents among their achievements. It is home to BioNTech, creator of one the first successful coronavirus vaccines.

That continued strength in cutting-edge research is not reflected in the Dax 30, considered by many international investors an outdated list of past successes: SAP, founded in the 1970s, is the only software company in an index made up mostly of chemicals, pharmaceutical and automotive companies. That the Dax measures the total return from its members — both share price growth and dividends — adds to the retro feel. Successful German start-ups, such as BioNTech and its peer CureVac, head to New York and the tech-focused Nasdaq to list.

Given the implosion of the Neuer Markt, Germany’s attempt to create a homegrown answer to Nasdaq in the 1990s, some caution from Deutsche Börse might be excused. But the requirement that companies must have two years of profit to be eligible for inclusion will limit the Dax 40’s scope to showcase more German tech companies. That partly reflects a backlash from often dividend-focused domestic investors after the inclusion of the lossmaking start-up Delivery Hero. Many successful start-ups, however, have not made a profit for years while giving shareholders a decent return through price appreciation.

Many Germans may be proud of their more consensual form of capitalism, without the brash boosterism of Silicon Valley, but tech entrepreneurs need to shout loud to be heard. DeepL, a Cologne-based rival to Google Translate, is little heard of outside the country, as is TeamViewer, a provider of video conferencing software. Without a visible tech-focused alternative to the Dax 30, promising start-ups must begin at the very bottom and gradually climb their way into the established corporate aristocracy.

An opportunity has also been missed to improve governance. Both the Wirecard debacle and the emissions scandal at VW were facilitated in part by weak oversight and governance exceptionalism. Yet the Dax 40 project does little to strengthen the independence of non-executives or the supervisory board structures they operate within.

Germany’s version of capitalism is a success story but it is hard now to find a Dax member that is not facing a dramatic transition over the next few years, from Deutsche Bank’s long-running travails to carmakers and energy companies coping with climate change. Reinvigorating its market requires more than adding 10 extra companies.

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