Numerical value of the DAX falls below FTSE

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A topic from News & Current Affairs: Business

furryfeaturesMon 12/09/11 14:30

This is quite a hard news story to report but one that I think is important. The thing is that stock market indices do not have a universal base, so they cannot be directly compared in terms of market capitalization of the companies listed on each exchange. However, big changes over a period of time can be used to show a broad level of comparison in the degree of change of one market versus another.

Earlier this year, while the FTSE100 index was standing around 6000, the DAX index was standing around 7000. Historically, the numerical value of the DAX has been 12-16% above the numerical value of the FTSE100. This is not a reflection of market capitalizations - I think that the London Stock Exchange is the third largest in the world, after New York and Tokyo, so Frankfurt is actually capitalized at a lower value than London, in part because many German companies are not publicly quoted.

Today, the DAX fell very sharply and the FTSE100 fell quite sharply. Thus, London is about 1% down but Frankfurt is about 3% down. This has happened many times over about a month. As a result, today the FTSE100 is standing around 5120, while the DAX is standing around 5060. This is a historic moment but not a good one. Germany has obviously taken a real beating in terms of investor confidence regarding the Euro Sovereign Debt Crisis.

I don't know what will happen next. Shares seem very low to me, compared to yields and, more importantly, forecasts of future yields. It may well be a good time to invest in equities, though a rough ride remains ahead and it would be wise to choose your shares carefully.

If the Euro crisis is resolved successfully, I could see the stock markets recovering quickly and the differential in numerical values between the two indices being restored. If crisis turns to disaster, the DAX could fall even more. Then the historic differential in the numerical values could be reversed.

The FTSE has fallen sharply in the last few months but the DAX has crashed. A fall from roughly 7000 to 5000 is 28.5% and that is scary. A fall from roughly 6000 to 5100 is a fall of about 16% and that is really very bad, even if it's not quite a crash.

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