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INNOVATIVE. GLOBAL. INDICES.

OCTOBER, 2014

A TALE OF GERMANECONOMIC SUCCESS ANDSUPERIOR COMPETITIVENESSAureliano Gentilini, Head of Research, STOXX Ltd.

STOXX LTD.

TABLE OF CONTENTS

Abstract 3

1 Frankfurt’s rise to global financial center 4

2 Macroeconomic picture 4

3 GDP impact by Länder and the World Cup 7

4 Leading business indicators 10

5 Impact of Russia sanctions and German export levels 11

6 Public finances 17

7 Manufacturing data and labor market 19

8 The outlook for Germany 22

9 Overview of the German securities market 25

10 Performance Analysis of DAX 31

Appendix A 45

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A TALE OF GERMAN ECONOMIC SUCCESS ANDSUPERIOR COMPETITIVENESS

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Abstract

This research paper provides an investment perspective of the German stock market. The Germaneconomy has recorded a story of superior competitiveness and economic success, proving its resilience tothe financial crisis. Far-sighted views of various German governments have helped foster the growth of asecurities market in the country and transform Frankfurt, in particular, to one of the world’s leadingfinancial center. At the end of August, the German stock market held 7th place in a ranking of worldwidestock exchanges by market cap, with a marked degree of internationalization of its ownership structure.

It appears Germany might be a typical case where history will not repeat itself. Due to a number of oddelements, a feel-good factor has not been observed in the German stock market so far. Even theeuphoria over the World Cup victory did not trigger relative outperformance of the DAX Index againstglobal stock market benchmarks.

Despite losing momentum in the second quarter, and recent uncertainties in the third quarter, economicgrowth in Germany in the last part of the year is expected to keep up reach the 1.4% GDP growth rateforecast for 2014. Employment levels along with increases in real wages should sustain economic growthin Germany as disposable household income is expected to boost consumption growth. Salarynegotiations in Germany for the current year have concluded. At the same time, planned infrastructureinvestments along with unabated export levels of investment goods in the US, UK and EU tradingpartners will contribute to Germany’s GDP growth. As the monetary stance by the Fed progressively shiftsto hawkish, a depreciation pattern of the euro is expected to boost export levels of the country. Germanyrecently ranked above China, as it held the top spot in a global ranking of countries by trade surplus.

After decades of declining public and private investment in domestic infrastructure and machinery andequipment, Germany is poised to a shift in the government policy, should a faltering growth patternmaterialize.

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“I LIKE THE DREAMS OF THE FUTURE BETTER THAN THE HISTORY OF THE PAST.”Thomas Jefferson (1743-1826)

1 Frankfurt’s rise to global financial center

The first documented European securities market was set up in Venice in the late 12th century, when localrulers explored new ways to finance their wars against their neighbors. In 1602 the world’s first formalstock exchange was founded in the Netherlands. The origins of FWB® Frankfurter Wertpapierbörse(Frankfurt Stock Exchange) date to the 9th century and the period of medieval fairs under Emperor Louis"the German" (c. 810 – Aug. 28, 876), also known as Louis II. The event that is generally considered tohave given birth to the Frankfurt Stock Exchange is the establishment in 1585 of a bourse to set upuniform exchange rates. The term bourse was first coined in the Belgian city of Bruges in the 15th centuryto designate periodic meetings of rich Italian traders at ter buerse plaza – a marketplace that was namedafter the patrician family Van der Beurse, which had lived there (from the late Latin word bursa, i.e. bag,which is derived from the ancient Greek word βύρσα, býrsa, which indicated the skin stripped off a hide).The German name Burs or Börse was documented in writing as a designation for the meeting ofmerchants to update the uniform and binding exchange rates for transactions in notes and coins as earlyas 1605.

In the following centuries, Frankfurt developed into one of the world’s leading stock exchanges. Inparticular, in the mid-1980s, one initiative led by a consortium of primary banks, which later becameknown as ‘Finanzplatz Deutschland’, is generally credited with1 promoting Germany, and in particularFrankfurt, as a financial center, while fostering a securities market in the country. This initiative wassustained by the German government, which later sponsored several new laws on the Promotion ofFinancial Markets. The first two laws in 1990 and 1994 were introduced by a Christian Democrat-ledgovernment, while the third and most prominent was introduced in 1998 by the newly elected SocialDemocrat-led government.

Nowadays, the German stock market holds the seventh place in a global ranking of stock exchanges bymarket capitalization and its ownership structure shows a marked degree of internationalization. Theshare of German DAX stocks held by foreigners has increased from 55.7% in 2005 to 63.7% in May,2014.

In this research piece, we will attempt to provide an investment perspective of the German stock market.The first section of the paper will shed light on the macroeconomic situation in Germany. In the secondpart, we will analyze some of the distinctive features of the German stock market and its fundamentals.The last section will review more closely the performance drivers of the DAX Index.

2 Macroeconomic picture

Fifteen years ago, in the late 1990s and the early 2000s, Germany was usually referred to as the “sickman of Europe”. The wording is originally attributed to Tsar Nicholas I of Russia back in 1853, in the run

1Deeg, R., 1999, Finance Capitalism Unveiled: Banks and the German Political Economy, Ann Arbor, University of Michigan Press

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up to the Crimean War. In a private conversation with Sir George Hamilton Seymour, the Britishambassador to St. Petersburg, Nicholas I of Russia labeled Turkey a “sick man”2, as the broader OttomanEmpire appeared to be on the verge of disintegration, mainly due to many disastrous wars.

In more recent periods, the term has been used to dub countries experiencing periods of economicdifficulties.

In the early nineties, the German economy faced a challenging economic situation mainly ascribable tothe cost of the reunification between West Germany and East Germany after the fall of the Berlin Wallearlier in 1989. In its 2004-2005 annual report, the German Advisory Council, in an assessment of overalleconomic development3, estimated net West-East Germany transfers to the tune of about 980 billioneuros for the period from 1991 to 2003. At that time, the total of net transfers to East Germanycorresponded to about half of the annual gross domestic product (GDP) of Germany.

Less than a decade later, Germany was described, alternatively, as “Europe’s growth engine” or an“economic superstar”, as it showed unprecedented resiliency in weathering the recent financial and eurocrisis and the post-credit bubble recession. Various drivers are often credited with stimulating theGerman economy and triggering a pattern of solid growth since mid-2000. First of all, a series of labormarket reforms, the so-called “Hartz Reforms”, which were implemented earlier in 2003 under theleadership of Chancellor Gerhard Schröder. Other explanations pointed to the evolution of Germany’seconomy and trade balance in the context of the Eurozone. Interestingly, more recently, an alternativeexplanation4 of Germany’s economic success over the last decade produced evidence of how thedistinctive governance structure of German labor market institutions allowed them to react resilientlyunder extraordinary economic circumstances. Indeed, a process of decentralization in the wage settingprocess along with an outstanding increase in the competitiveness of German industry - due to afavorable evolution of unit labor costs, which were well under way when the “Hartz Reforms” wereimplemented - were the key drivers of the dramatic reduction in German’s unemployment and Germanlabor market insulation from the recessionary pattern in 2008-2009.

Latest German GDP growth readings appear to cast doubt on the sustainability of the pattern ofeconomic growth. In the second quarter of 2014, at 2010 index price, GDP decreased 0.2% quarter onquarter, once adjusted for price, seasonal and calendar variations. Despite losing momentum, theGerman economy continued to post healthy growth rates with respect to the corresponding quarter of theprevious year, as it rose 1.3% once adjusted for price, seasonal and calendar variations (0.8% if price-adjusted only).

We have the view that in the second quarter of 2014, the slowdown in the German economy was not asweak as the decline in GDP suggests. Even though seasonally adjusted investment expenditure byenterprises for new machinery and equipment fell from the first quarter’s level, the negative reading forsecond-quarter GDP was mainly ascribable to weather-induced factors linked to a drop in construction

2"We have on our hands a sick man -- a very sick man: it will be, I tell you frankly, a great misfortune if, one of these days, he should slip away

from us, especially before all necessary arrangements were made." Source: Parliamentary Papers. Accounts and Papers: Thirty-Six Volumes:Eastern Papers, V. Session 31 January-12 August 1854, Vol. LXXI (London: Harrison and Son, 1854), doc. 1, p. 23

Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, Jahresgutachten 2004/05, „Erfolge im Ausland -Herausforderungen im Inland", Tabelle 100, Seite 644.4

Dustmann C., Fitzenberger B., Schönberg U., Spitz-Oener A., From Sick Man of Europe to Economic Superstar: Germany’sResurgent Economy, Journal of Economic Perspectives—Volume 28, Number 1—Winter 2014.

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investment, and, to a minor extent, a negative contribution of foreign trade as imports increased at ahigher pace than exports. The construction output at the beginning of the second quarter fell short of itsstrong activity levels in the first quarter, when the construction industry benefited from mild winterweather, anticipating work which had been planned for early summer, but preponed because of the mildwinter.

A “major” revision of German national accounts going back to 1991, which was carried out at thebeginning of September to meet the new ESA 2010 standards, resulted in a higher nominal GDP ofroughly 3% on average. According to new standards, a more accurate definition of sectors, especially ofthe government sector, as well as the classification of military expenditure and expenditure on researchand development as capital formation, has been implemented. Time series revision had a limited effecton economic growth though, given all variables have been recalculated back to 1991. As clarified byDestatis, the annual average growth rate from 1991 to 2013 has remained virtually unchanged, while thequarterly rates of change have been revised by up to 0.4 percentage points upwards or downwards.However, the basic cyclical pattern of the time series has remained largely unchanged.

FIGURE 1: GERMANY’S GDP GROWTH RATE – Q1, 2006-Q2, 2014

Source: Destatis Statistisches Bundesamt

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FIGURE 2: GERMANY’S GDP BROKEN DOWN BY LÄNDER (STATES)

Source: Destatis Statistisches Bundesamt

3 GDP impact by Länder and the World Cup

The administrative structure of the federal state5 of Germany is a three-tiered, sub-national system. Thenotation below reflects 2011 OECD regional classification:

TL2: 16 Länder. Berlin, Bremen and Hamburg are states in their own right and called city states(Stadtstaaten).

TL3: 97 Social Planning Regions, among which 27 predominantly urban regions (about half oftotal population, +0.3 percentage points over the past 15 years), 50 intermediate regions (40%, –0.1 percentage points), and 20 predominantly rural regions (10%, –0.2 percentage points).

The second tier at the intermediate level comprises 323 rural districts (Landkreise) and the thirdtier at the local level comprises 12,196 municipalities (Gemeinden) and 116 district-free cities(Kreisfreie Städte).

According to OECD’s Regional Outlook for 2011, Germany’s economy is less concentrated than the OECDaverage based on the index of geographic concentration among TL3 regions. The top 10% of Germany’sTL3 regions produce 35% of national GDP as opposed to 38% in the OECD. By 2013 the top 13th

percentile of Germany’s regions (i.e. Nordrhein-Westfalen, Bayern and Baden-Württemberg) producedabout 40% of the country’s GDP. As expected, the breakdown of 2013 GDP reading by Länder shows that

5As set out in Article 20 of its Basic Law (Constitution), Germany is a federal state. Germany has three levels of government – i.e.

Federation, Länder, and municipalities. Nonetheless, this structure is not clearly defined in Germany’s Basic Law. The Basic Law statesclear rules for assignments, expenditure and revenue responsibilities and legislative powers only for the Federation and the Länder. The origins ofa federal structure in Germany go back to the Middle Ages and the days of the Holy Roman Empire of the German Nation, when the Emperorwas elected through preferences expressed by princes known as electors (Gunlicks Arthur B., The Länder and German Federalism, ManchesterUniversity Press, 2003).

2.95%

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GDP at current prices 2013 (EUR bn - left scale) GDP at current prices 2012 (EUR bn - left scale)

2013 GDP growth year on year (right scale)

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the highest contribution to the 2.76% GDP growth rate for 2013 came from the three regions in the top13th percentile. Bayern contributed 0.54%, while Nordrhein-Westfalen and Baden-Württemberg provideda 0.49% and a 0.44% contribution to the country’s GDP growth, respectively. Year on year at the end of2013, Berlin recorded the largest GDP growth rate, with Hessen (+3.38%) and Brandenburg (+3.25%)being the runners-up.

OECD data show that Hamburg (1.62%), Bayern (1.61%), Bremen (1.53%) and Hessen (1.27%) recordedabove national (1.19%) average growth rates in GDP per capita over the decade until 2011, as opposed toBaden-Württemberg (1.15%) and Nordrhein-Westfalen (0.74%). As a result, the largest contribution tooverall GDP growth was by Bayern and Baden-Württemberg, contributing to 27% and 17%, respectively.

The “feel-good factor” from the recent victory at the 2014 Football World Cup might well havecontributed to reinforce Germany’s supremacy within the EU as the advocate of the austerity measures tocure the sickness of the other Eurozone members and the influential role of Angela Merkel in MrJuncker’s appointment as EU Commission President. Nonetheless, any relationship of direct causalitybetween Germany’s World Cup victory and either the economy or consumers’ behavior is not supportedby compelling evidence and it is a matter of debate.

Recent research from Halifax shows that an improvement in the rate of growth in consumer spending inthose countries that reached the semi-finals was observed in four out of the last six World Cuptournaments. At the same time, Halifax found that the World Cup’s triggered effects can lead toincreased spending even if a tournament ends unsuccessfully. A typical example of this is given by Brazil,where, spending rose by 9% after a loss in the 1998 final, compared with a relatively modest growth rateof 3% for the previous year. Nonetheless, despite potential positive effects stemming from a “feel-goodfactor” associated with World Cup success, growth in consumer spending is primarily driven andsustained by macro factors such as employment, housing and disposable income, credit and corporateearnings growth.

Some German media tried to create a connection between the World Cup victory and the economicsituation in Germany. They pointed to “how ‘Germany’s 12th man’ Angela Merkel proved to be a luckycharm” (The Telegraph, Jul. 14, 2014, online edition). Amongst others, in its Issue 29/2014 edition, thecover of the magazine “Der Spiegel” read "Wir sind wieder…wer?" - an adjustment of the German saying"We are back again", turning the original statement into a question about “who we [the Germans] are.”And the Handelsblatt, in its July 15th edition, featured a cover story on “Vorbild Deutschland“ (Role modelGermany). The German financial newspaper asked: “Was kann die Wirtschaft vom WM-Erfolg desNationalteams lernen?“ (What can the economy learn from the World Cup success of the nationalteam?). It identified three key factors as well as a fundamental and central value, i.e. respect. The threekey factors regarded the esprit de corps, the absolute focus on the goal, and the young talentdevelopment scheme.

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FIGURE 3: DER SPIEGEL ISSUE 29/2014 FIGURE 4: ‘GERMANY’S 12TH MAN’ ANGELA MERKEL

Source: Spiegel Online Source: The Telegraph

The 2014 World Cup undisputedly contributed to boost an identity of national pride among Germans,decades after World War II and Nazism marked the darkest chapters in the country’s history. On Twittertwo icons went viral in the run up to the final 2014 World Cup match. The first one referred to an old frontpage from the Berliner Morgenpost newspaper, which showed a traditional Argentine steak with theheadline “Made in Argentina”, and a fork and knife with the heading “Made in Germany”. The secondshowed Sunday’s (Jul. 13, 2014)front page from the same Berliner Morgenpost newspaper, featuringscrabble tiles that used the German football players’ names to spell out “Welt Meister” (WorldChampions).

FIGURES 5 & 6: ICONS THAT WENT VIRAL ON TWITTER IN THE RUN UP TO THE FINAL 2014 WORLD CUP MATCH

Source: Berliner Morgenpost Source: Berliner Morgenpost

Interestingly July 2014 also marked the 60th anniversary of West Germany’ victory at the 1954 World Cupagainst “the Mighty Magyars’” of the postwar period, led by the "The Galloping Major" Ferenc Puskás.That unexpected victory is often credited with playing a critical role in the process of rehabilitating the

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image of the country after the Word War II and paving the way for a pattern of economic growth in thecountry’s post-war economic miracle.

4 Leading business indicators

According to the OECD’s leading indicators reading published in September, Germany was losing steamas it declined to 99.98 in July from 100.24 the previous month, with a 0.26% fall month on month and a0.15% decrease from the corresponding period a year earlier. The amplitude adjusted Composite LeadingIndicators (CLI), which are designed to anticipate turning points in economic activity relative to trend,appear to point to slowing momentum for Germany. The slowing pattern of the indicators for Germanymight have been expected, given recent negative readings of the component series of the CLI, namelythe IFO business climate indicator, the tendency in the IFO orders inflow/demand (manufacturing sector),the expectation in the IFO export order books (manufacturing), the new orders in the manufacturingindustry and the level of finished goods stocks in the manufacturing sector.

FIGURE 7: COMPOSITE LEADING INDICATOR - SEPTEMBER, 2012 - JULY, 2014

Source: OECD

The latest medium-term outlook published by the Deutsche Bundesbank depicts a mixed scenario forthe German economy. Despite macroeconomic forecast having been revised downward for the currentyear, following a disappointing second-quarter reading, the growth in GDP is projected at a healthy 1.5%at the end of 2014. Economic activity is expected to stay at sustained levels. Recently the Germangovernment revised its growth forecasts to 1.2% and 1.3% for 2014 and 2015 respectively from 1.8% and2.0%, with Finance Minister Wolfgang Schäuble reaffirming that he expected economic weakness to betemporary.

Germany is expected to achieve at the end of 2014, a GDP about 10% higher than the end-2008 reading(price-, seasonally, and calendar-adjusted). Germany’s GDP growth above its pre-recessionary level is wellabove any of the other countries in the Eurozone, where GDP readings are still below 2008 levels;nonetheless it is expected to lag behind the US, for which a GDP reading 13% above its pre-recessionarylevel is forecast by the end of 2014. Germany entered a deep recession in 2009 as world trade flowscollapsed. Germany’s GDP contracted by 6.9% in the first quarter of 2009 on a price-, seasonally, and

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calendar-adjusted basis, but the recession was short-lived and the economy recovered stronglythereafter. GDP was back to its pre-recession level by the first quarter of 2011.

The Ifo key survey of German business climate6 declined for the fifth month in a row in September to104.7, the lowest level since April 2013. The closely watched gauge of business sentiment is also asignificant proxy of economic health for the Eurozone as a whole, as Germany accounts for more than aquarter of total Eurozone GDP. Assessment of the current situation eased from the August reading,although it remained at a favorable level. Expectations with regard to the six-month business outlookdropped to their lowest level since December, 2012. In particular, the outlook in manufacturing worsenedin September as exports are expected to hardly sustain the sector within a six-month time horizon.

FIGURE 8A: IFO BUSINESS CLIMATE INDEX GERMANY(2005=100, TRADE AND INDUSTRY, SEASONALLYADJUSTED, JAN. 2002-SEP. 2014)

FIGURE 8B: IFO BUSINESS CLIMATE BALANCES GERMANY(2005=100, TRADE AND INDUSTRY,SEASONALLYADJUSTED, JAN. 2002-SEP. 2014)

Source: Ifo Business Survey Source: Ifo Business Survey

5 Impact of Russia sanctions and German export levels

German export data give evidence that trading activity with Russia started to decline even before thesanctions came into effect. In fact, a declining pattern of exports to Russia has been observed since May,

6The Ifo Business Climate Index is based on ca. 7,000 monthly survey responses from firms in manufacturing, construction, wholesaling and

retailing. The firms are asked to give their assessments of the current business situation and their expectations for the next six months. They cancharacterise their situation as “good”, “satisfactory” or “poor” and their business expectations for the next six months as “more favourable”,“unchanged” or “more unfavourable”. The balance value of the current business situation is the difference between the percentages of theresponses “good” and “poor”, the balance value of the expectations is the difference between the percentages of the responses “morefavourable” and “more unfavourable”. The business climate is a transformed mean of the balances of the business situation and theexpectations. For the purpose of calculating the index values, the transformed balances are all normalized to the average of the year 2005.

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2013, with the value of these exports falling by nearly a fifth by May, 2014. According to data releasedearlier in August by the German Federal Statistical Office (Destatis) in the first five months of the currentyear, exports to Russia were down 15% year on year, reaching roughly 12.9 billion euros. The main exportproducts were machinery and equipment (22%), motor vehicles, trailers and semi-trailers (20%) andchemical products (10%). Within this group of products, the decrease in exports was largest for motorvehicles, trailers and semi-trailers (22%).

Nonetheless, according to the results of a recent survey commissioned by the German Chambers ofCommerce (DIHK), about a third of German companies polled expect a sharp drop (up to 50%) in theirturnover as a result of sanctions imposed on Russia due to the Ukraine crisis. At the same time, abouttwo-thirds of the survey respondents expect steady or even improved trade with Russia.

New sanctions on Russia were enforced by the European Union and the US on Sep. 12, 2014, leading toadditional restrictions on oil companies and Russia’s state banks and extending asset freezes and travelbans to 24 leading members of Vladimir Putin's inner circle. In particular, Rosneft, Transneft, andGazprom Neft will be prevented from raising long-term debt on European capital markets.

The former decision by Europe and then US to put sanctions on Russia's largest banks (and ban tradingand capital markets access) hit financials at the end of July and the beginning of August. It is expectedthat in the short run, banking stocks will remain volatile as potential risks arising from banks’ exposure toforeign claims on Russia weigh on market sentiment.

According to the latest available data published by the Bank for International Settlements oninternational bank claims (ultimate risk basis) for Q1 2014, European banks were exposed to Russia for154 billion US dollars (or 74.0% of the overall exposure), down from 191 billion US dollars in the samequarter one year ago. Non-European banks had an exposure of 52 billion US dollars, down from 67 billionUS dollars in the first quarter last year. In particular, German banks decreased their claims exposure toRussia by 25% to 17.4 billion US dollars at the end of first quarter, compared with the same quarter a yearearlier. German banks’ claims exposure to Russia as a percentage of the country’s overall foreign claimswas relatively minimal and stood at 0.68% at the end of the first quarter.

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FIGURE 9: INTERNATIONAL BANK CLAIMS EXPOSURE TO RUSSIA – Q1, 2014 VS. Q1, 2013

Source: STOXX calculations on BIS data

Despite concerns about whether the export sector will be able to sustain Germany’s economic growthpattern for the rest of the year and the next as escalating sanctions against Russia appeared to impactthreatened trade flows, German exports continued to grow at strong pace in July - +8.5% year on year tothe value of 101.0 billion euros, the highest monthly export value ever recorded.

At the same time, imports increased 1.0% year on year at the end of July to the value of 77.6 billioneuros. According to the latest data published by Destatis, the foreign trade balance recorded a recordsurplus of 23.4 billion euros (22.2 billion euros in calendar- and seasonally adjusted terms) in July, 2014,climbing about 44.0% over the reading in July, 2013. July’s reading paved the way for a return to growthin the third quarter after the German economy shrank in the three-month period ended June.

Germany exported goods to the value of 56.9 billion euros to the member states of the European Union(EU), a 9.6% increase from the reading in July, 2013. Germany’s exports to EU countries represented56.3% of the overall exports of the country. Imports from EU countries amounted to 50.4 billion euros inJuly, with a 2.6% increase from the corresponding period a year earlier. Within the EU, exports to EMUcountries (+6.2% year on year) in July, 2014 accounted for 62.4% of the overall exports to the region,while the value of imports (-0.5% year on year) from the same group of countries represented 68.8% ofthe aggregated value, with a foreign trade balance of 0.8 billion euros. For the same period, goods to thevalue of 21.4 billion euros (+15.9% year on year) were exported to non-EMU EU countries, while the valueof the goods imported from the same countries was 15.7 billion euros (+10.3% compared to thecorresponding period of last year), with a trade balance of 5.7 billion euros. The value of exports tocountries outside the European Union amounted to 44.1 billion euros in July, 2014 (or 43.7% of theoverall export values), while imports from those countries totaled 27.2 billion euros. Year on year, in July,exports to non-EU countries increased by 7.2%, while imports from the same countries decreased by1.8%.

Germany is a heavily export-oriented economy and German GDP growth remains highly sensitive to thevalue of exports. Based on seasonally and calendar-adjusted readings for the second quarter, exports in

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Germany accounted for about 45% of GDP, compared to about 30% for France, Italy, and UK, and about15% for both Japan and the US.

Figures 10A and 10B show the top 15 trading partners in foreign trade for Germany by value of exportsand imports respectively. According to the latest available data at the end of 2013, published at thebeginning of September 2014, the country of destination of German exports that held the top spot invalue terms was France (100.2 billion euros, corresponding to 9.2% of overall German exports). UnitedStates (88.4 billion euros, or 8.1% of overall exports) and the UK(75.6 billion euros, or 6.9% of the totalexports) were the runners up.

A relevant portion of the overall goods (896.2 billion euros in value terms) imported by Germanyoriginated from the Netherlands. Imports from the Netherlands (89.2 billion euros) accounted for 9.9% oftotal German imports. The countries that ranked at the second and third places in the league table of toptrading partners in foreign trade by imports were the People's Republic of China and France, with value ofimports to the tune of 73.7 billion euros (8.2% of overall imports value) and 64.1 billion euros (7.1% ofoverall imports value).

Destatis data highlight that Russia is a major trading partner of Germany. Russian Federation ranked 11th

and 7th, respectively, in the league tables of Germany’s top trading partners by value of exports and valueof imports at the end of 2013. The value of exports amounted to 36.11 billion euros (corresponding to3.3% of total value of exports), while the value of imports stood to the tune of 40.4 billion euros (4.5% ofthe overall value of imports at the end of 2013). However, the dependency of German business activitieson Russia is moderate in relation to the worldwide trade partnership of the German export sector. Asclarified by Destatis, about 10% of all exporting enterprises in Germany export goods to Russia. For aboutthree-quarters of them, exports to Russia account for no more than 25% of their total exports. This isalmost in line with the proportion of exports to Russia in value terms. About 72% of exports to Russia arerun by corporations for which exports to Russia account for no more than a quarter of their total exports.

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FIGURE 10A: GERMANY'S TOP 15 TRADING PARTNERS(VALUE OF EXPORTS AND AS % OF TOTAL EXPORTS)

FIGURE 10B: GERMANY'S TOP 15 TRADING PARTNERS(VALUE OF IMPORTS AND AS % OF TOTAL IMPORTS)

Source: Statistisches Bundesamt Destatis, Foreign Trade 2013, Sep. 1,

2014

Source: Statistisches Bundesamt Destatis, Foreign Trade 2013, Sep. 1,

2014

Eurostat data for 2013 show the importance of Russia in extra-EU trade of energy products. Russia wasthe largest exporters to the EU of both natural gas and petroleum oil in 2013. In terms of value, importsfrom Russia in 2013 represented about 34% of total EU imports of crude oil and about 49% of total EUimports of natural gas in gaseous state. Russia accounted for 28% of extra-EU imports of coal. Germany,along with Italy and The Netherlands, relied on Russia for less than 50% of its national imports ofpetroleum oils. As for natural gas, Germany which accounts for more than 20% of overall EU imports,was the largest importer from Russia, followed by Italy and Spain (with a market share of between 10%and 20 %) and then Belgium, the Netherlands and the United Kingdom (with a share between 5% and10%).

100.18;9.2%

88.38;8.1%

75.64;6.9%

70.96;6.5%

67.03;6.1%

56.21;5.1%

53.19;4.9%

47.32;4.3%

42.40;3.9%

42.23;3.9%

36.11;3.3%

31.33;2.9%

31.05;2.8%

21.52;2.0%

20.64;1.9%

France United StatesUnited Kingdom NetherlandsChina, People's Republic of AustriaItaly SwitzerlandPoland BelgiumRussian Federation SpainCzech Republic TurkeySweden

89.18; 9.9%

73.70; 8.2%

64.06; 7.1%

48.45; 5.4%

47.14; 5.3%

42.49; 4.7%

40.41; 4.5%

38.99; 4.3%

38.25; 4.3%

36.76;4.1%

35.89; 4.0%

33.03; 3.7%

23.67; 2.6%

21.91; 2.4% 19.51; 2.2%

Netherlands China, People's Republic ofFrance United StatesItaly United KingdomRussian Federation BelgiumSwitzerland AustriaPoland Czech RepublicSpain NorwayJapan

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FIGURE 11A: EU-COUNTRIES, SHARE OF NATIONALIMPORTS OF PETROLEUM OILS AND NATURAL GAS,2013, (TRADE IN VALUE)

FIGURE 11B: EU-COUNTRIES, SHARE IN TOTAL INTRA-EU28IMPORTS AND EXPORTS OF PETROLEUM OILS ANDNATURAL GAS, 2013, (TRADE IN VALUE)

Member State Petroleumoils Natural gas Petroleum

oils Natural gas Petroleumoils Natural gas

Belgium 0-5% 0-5% 0-5% 5-10% 25-50% 0-25%Bulgaria 0-5% 0-5% 0-5% 0-5% 75-100% 75-100%Czech Republic 0-5% 5-10% 0-5% 0-5% 75-100% 75-100%Denmark 0-5% 0-5% 0-5% 0-5% 0-25% 0-25%Germany 10-20% > 20% 10-20% > 20% 25-50% 25-50%Estonia 0-5% 0-5% 0-5% 0-5% 0-25% 75-100%Ireland 0-5% 0-5% 0-5% 0-5% 0-25% 0-25% Greece 0-5% 0-5% 0-5% 0-5% 25-50% 50-75%Spain 0-5% 0-5% 10-20% 10-20% 0-25% 0-25%France 0-5% 0-5% 10-20% 0-5% 0-25% 0-25%Croatia 0-5% 0-5% 0-5% 0-5% 50-75% 0-25%Italy 5-10% > 20% 10-20% 10-20% 25-50% 25-50%Cyprus 0-5% 0-5% 0-5% 0-5% 0-25% 0-25%Latvia 0-5% 0-5% 0-5% 0-5% 0-25% 75-100%Lithuania 5-10% 0-5% 0-5% 0-5% 75-100% 75-100%Luxembourg 0-5% 0-5% 0-5% 0-5% 0-25% 0-25%Hungary 0-5% 5-10% 0-5% 0-5% 75-100% 75-100%Malta 0-5% 0-5% 0-5% 0-5% 0-25% 0-25%Netherlands 10-20% 0-5% 10-20% 5-10% 25-50% 0-25%Austria 0-5% 5-10% 0-5% 0-5% 0-25% 75-100%Poland 10-20% 5-10% 0-5% 0-5% 75-100% 75-100%Portugal 0-5% 0-5% 0-5% 0-5% 0-25% 0-25%Romania 0-5% 0-5% 0-5% 0-5% 25-50% 75-100%Slovenia 0-5% 0-5% 0-5% 0-5% 0-25% 75-100%Slovakia 0-5% 5-10% 0-5% 0-5% 75-100% 75-100%Finland 5-10% 0-5% 0-5% 0-5% 75-100% 75-100%Sweden 0-5% 0-5% 0-5% 0-5% 25-50% 0-25%United Kingdom 0-5% 0-5% 5-10% 5-10% 0-25% 0-25%EU 100% 100% 100% 100% 33% 41%

Share (%) of imports in totalEU28 imports from RU of

the product

Share (%) of imports in totalextra-EU28 imports of the

product

Share (%) of imports fromRU in total national extra-

EU28 imports of the productMember State Petroleum

oilsNatural gas Petroleum

oilsNatural gas

Belgium > 20% 10-20% 0-5% 10-20%Bulgaria 0-5% 0-5% 0-5% 0-5%Czech Republic 0-5% 0-5% 0-5% 0-5%Denmark 0-5% 0-5% 5-10% 0-5%Germany > 20% > 20% 0-5% > 20%Estonia 0-5% 0-5% 0-5% 0-5%Ireland 0-5% 0-5% 0-5% 0-5%Greece 0-5% 0-5% 0-5% 0-5%Spain 0-5% 0-5% 0-5% 0-5%France 5-10% > 20% 0-5% 0-5%Croatia 0-5% 0-5% 0-5% 0-5%Italy 0-5% 5-10% 0-5% 0-5%Cyprus 0-5% 0-5% 0-5% 0-5%Latvia 0-5% 0-5% 0-5% 0-5%Lithuania 0-5% 0-5% 0-5% 0-5%Luxembourg 0-5% 0-5% 0-5% 0-5%Hungary 0-5% 0-5% 0-5% 0-5%Malta 0-5% 0-5% 0-5% 0-5%Netherlands 10-20% 0-5% > 20% > 20%Austria 0-5% 0-5% 0-5% 0-5%Poland 0-5% 0-5% 0-5% 0-5%Portugal 0-5% 0-5% 0-5% 0-5%Romania 0-5% 0-5% 0-5% 0-5%Slovenia 0-5% 0-5% 0-5% 0-5%Slovakia 0-5% 0-5% 0-5% 0-5%Finland 0-5% 0-5% 0-5% 0-5%Sweden 0-5% 0-5% 0-5% 0-5%United Kingdom 0-5% 5-10% > 20% 5-10%EU 100% 100% 100% 100%

Share (%) in total intra-EUimports of the product

Share (%) in total intra-EUexports of the product

Source: Comext, Eurostat Source: Comext, Eurostat

The impact on energy prices of Germany’s energy policy, and in particular the government’s decision todecrease dependence on fossil fuels and foster renewable energies, is a source of concern in the industrysector. Nonetheless, beyond the price impact in the short run, the move into alternative energy mightoffer opportunities for the country, as the long-term goal of the German government is to make theindustry more sustainable and create exportable technologies.

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FIGURE 12: PRODUCER PRICE INDICES VS. CONSUMER PRICE INDEX FOR ELECTRICITY, 2010=100 - JAN . 2000 - AUG.2014

Source: Statistisches Bundesamt Destatis

6 Public finances

Germany’s public finances show a state of good health. Based on the Federal Finance Ministry’s latestmedium term projections, the Bundesbank estimates general government surpluses in a magnitude of0.5% of GDP from 2016 onwards. At the same time, the debt-to-GDP ratio has started edging downward.Nonetheless, medium-term projections forecast that debt ratio declines will not be sufficient to meet the60% threshold target by 2018. According to what has been declared by Finance Minister WolfgangSchäuble, speaking to the lower house of parliament on Sep. 9, Germany is poised to record a publicsector surplus for the third year running and the 2015 budget estimates no net new borrowing for the firsttime since 1969.

Echoing a European Central Bank announcement in September, regarding measures to stimulate growth,the International Monetary Fund (IMF) managing director Christine Lagarde hinted that month thatGermany should act on boosting public investment to aid the Eurozone’s faltering economic recovery.She told Les Echos: "We think that public or private investment (in Germany) to finance infrastructurewould be welcome.”7

Recent Franco-German initiatives go in this direction. A paper jointly drafted by the German and Frenchfinance ministers, Wolfgang Schäuble and Michel Sapin, and presented at an Ecofin Council meeting in

7And she added: “No-one is asking the German economy to be less competitive, needless to say. Yet Germany most probably has the fiscal

space to support the European recovery and is offering to use it. We think that public and/or private investments aimed at financinginfrastructure would be welcome. I am not talking about creating new highways, but rather about investments in maintenance and upkeep; forover the past few years, Germany has invested very little in its transportation infrastructure. Just like in the United States, the network isdeteriorating, which makes stepping up efforts perfectly justifiable. Germany intends to earmark 0.2 percent of GDP for these efforts over thenext four years. We think that Germany could dedicate an additional 0.5 percent of GDP annually over four years, according to the Fund’sanalysis.”

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14

Producer Price Index - Electricity when delivered to commercial plantsProducer Price Index - Electricity when delivered to special contract customersConsumer Price Index for electricity

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September, 2014 in Milan, outlines a proposal to increase private investments in Europe. In particular, theproposal aims at creating an attractive environment for private investors as governments commit toimprove the investment climate and increase the potential for growth through structural reforms. Thefocus on creating favorable business conditions to invest across member states, rather than a larger scalegovernment spending plan, appears to reflect a number of constraints existing also in Europe’s largesteconomy, in addition to the need to meet budget rules under the Maastricht Treaty. Germany appears tohave limited possibility of maneuvering on the stimulus front given Merkel’s government commitment todeliver on its promise of a “schwarze Null”, i.e. a balance of the federal budget in 2015. Nonetheless, therecent interest rate pattern contributed to cut the cost of borrowing in Germany significantly, thus easingthe burden on public finances and, ceteris paribus, offering potential budget support. According toBundesbank estimates, by virtue of a decline in interest rates, Germany saved 120 billion euros in interestexpenditures in the last seven years, of which 37 billion euros came in 2013.

FIGURE 13: ESTIMATES OF EUROZONE GENERAL GOVERNMENT GROSS DEBT AS A PERCENTAGE OF GDP – 2014 VS.2015

Source: International Monetary Fund, World Economic Outlook Database, October, 2014

80.1

1 101.

93

117.

41

10.1

9

57.9

3

95.2

0

75.5

0

174.

25

112.

44 136.

72

35.9

9

24.2

0

71.9

1

69.4

1

131.

26

55.6

5 77.4

0 98.6

4

78.6

2 101.

73 125.

97

10.3

9

59.3

5 97.6

7

72.5

4

170.

98

111.

68 136.

43

35.2

9

26.4

5

71.2

7

69.6

2

128.

72

55.7

4 75.5

5 101.

10

020406080

100120140160180200

2014 2015

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FIGURE 14: ESTIMATES OF EUROZONE GENERAL GOVERNMENT NET LENDING/BORROWING AS A % OF GDP – 2014VS. 2015

Source: International Monetary Fund, World Economic Outlook Database, October, 2014

According to provisional results published by Destatis, at the end of the first half of 2014, the overall debtof the German Federation, Länder and municipalities/associations of municipalities, including all extrabudgets, amounted to 2,044.2 billion euros. The second quarter’s reading represented a 0.2% (or 4.4billion euros) increase quarter on quarter. Broken down by entity group, the debt of the federationincreased 0.4% (or 5.1 billion euros) quarter on quarter and the indebtedness ofmunicipalities/associations of municipalities rose by 0.3% in the second quarter (0.45 billion euros) to138.8 billion euros. Conversely, the debt exposure of the Länder stood at 618.6 billion euros , a 0.2%decrease (equivalent to 1.1 billion euros) from the end of March reading.

At the same time, the new European System of National and Regional Accounts (ESA 2010) defines thegeneral government sector according to new rules. As a result, the recalculated German generalgovernment debt level using amended EU-wide calculation standards for the country's autumnnotification under the European budgetary surveillance procedure amounted to an upwardly revised 2.159trillion euros at the end of 2013. The general government debt level was up 12 billion euros on the levelreported in the spring notification as public corporations, which are now classified within the generalgovernment sector, boosted Germany's debt level by over 7 billion euros. As a result, given the nominalGDP reported by the Federal Statistical Office on Aug. 14, 2014 was significantly higher due to accountrevisions, the debt-to-GDP ratio contracted from its previously calculated level by 1.6 percentage points to76.9%.

7 Manufacturing data and labor market

Weak manufacturing data suggested German economy was losing steam at the end of the secondquarter. Orders dropped 3.2% month-on-month in June - the largest decline since September, 2011 andworse than expected. Manufacturing orders from abroad fell 4.1%, which the German Economy Ministry

-3.0

4

-2.5

7

-4.3

7

-0.3

3

-2.4

0

-4.4

10.

29

-2.6

9

-4.2

2 -3.0

4

-0.8

1

0.37

-2.6

7

-2.4

7

-4.0

5 -2.8

9

-4.9

8

-5.7

3

-1.5

2

-2.1

9

-3.9

1

-0.3

1

-1.3

7

-4.3

0

0.15

-1.8

6

-2.8

3

-2.3

1

-0.6

7

-1.4

5

-2.4

1

-2.0

5

-2.5

0

-2.3

4

-3.8

9

-4.7

2

-7-6-5-4-3-2-101

2014 2015

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linked to sanctions against Russia amid the Ukrainian crisis. He cited "geopolitical developments andrisks" as the dominant factor in the "clear reticence in orders".

However, after fueling worries about economic growth in the second quarter, price-adjusted new orders inmanufacturing in July, 2014 (rebased to 2010=100) increased an upwardly revised seasonally andworking day adjusted 4.9% in June (following a 2.7% drop month on month in June, 2014). Domesticorders increased 1.7% and foreign orders by 6.9%. As for the geographic region of origin of trade inforeign transactions, new orders from the euro area rose 1.7% on the previous month, while new ordersfrom other countries increased by 9.8%.

Along the same pattern, in July, 2014 production in German industry rose to a downwardly revised 1.6%month on month on a price-, seasonally- and working day-adjusted basis according to data fromDestatis. July’s reading followed a revised 0.4% increase in June 2014 compared with May 2014. Industrysectors contributed to a different extent to the overall reading. Production in the manufacturing sectorsexcluding energy and construction rose by 2.6%. Manufacturers of capital goods posted the largestgrowth for the month at 5.0%, while the production of intermediate goods and consumer goods rose atlower monthly paces (+0.8% and +0.1%, respectively). Energy production dropped by 3.7%, while theproduction in construction increased by 1.7%.

Later in August German factory orders showed signs of volatility as they slumped by the largest amountsince 2009, casting doubts about the confidence in an economic rebound following second quarter GDPdecline. A general weakness in August orders due to school holidays along with a faltering growth patternin the euro-area economy and geopolitical risks took their toll on the monthly reading. The seasonally-and working day-adjusted 5.7% drop month on month came at a time when the German governmentfaced pressure to remove restraints to a tight fiscal policy and increase government spending to sustainEuropean recovery. Domestic orders declined 2.0% month on month, and foreign orders fell by a larger8.4%. As for the geographic region of origin of trade in foreign transactions, new orders originated fromEurozone countries in August decreased 5.7% compared to July’s reading, while new orders from non-Eurozone countries dropped by 9.9%.

Factory orders of manufacturers of intermediate and capital goods recorded decreases to the tune of3.0% and 8.5%, respectively. Consumer goods were a bright spot as orders increased 3.7% for themonth. Foreign orders (+8.1%) accounted for most of the monthly increase, with Eurozone countries andnon EMU-members posting positive readings in August to the tune of +8.5% and 7.7%, respectively.Resembling the pattern of factory orders, according to provisional data published by Destatis, industrialproduction dropped 4.0% month on month in August on a price-, seasonally- and working day-adjustedbasis. Industrial production levels excluding energy and construction fell by 4.8%. Broken down byindustry sector the largest decline was recorded by the manufacturers of capital goods (–8.8%). Theproduction of intermediate goods and of consumer goods decreased by 1.9% and 0.4%, respectively,compared with July’s reading. Energy production was a bright spot as it marginally increased by 0.3% forthe same month, while the production in construction decreased by 2.0%.

Earlier in September, solid retail sales published for August, along with rosy figures for new orders inmanufacturing and industrial production readings for July, offered hope that private consumption andproduction in industry sectors excluding construction and energy can help sustain German economy inthe third quarter. Monthly retail sales rose by 2.5% in August, their sharpest increase in more than threeyears.

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As published by the German Federal Statistical Office before the end of September, the total price-adjusted value of orders received by the construction industry decreased 5.3% year on year in July.Broken down at sector level, July’s reading shows that while building construction demand declined 2.7%,in civil and underground engineering it dropped 7.7%. One of the reasons for the sharp decline in July isthat the orders had been exceptionally high in July, 2013, which marked the highest level since July2003.

The number of hours worked in July, 2014 within companies with 20 or more workers employed, rose by0.1% compared to the same month of last year. At the end of July, 2014, the number of workersemployed in the overall building sector amounted to 407,000. The reading was 3,000 persons, or 0.6%,higher than a year earlier. The total revenue declined by 2.0% to about 6.3 billion euros compared withJuly, 2013. Nonetheless, in the first seven months of 2014, new orders in the construction industryincreased in real terms by 0.4% compared to the same period last year. The total turnover of theconstruction industry from January through July 2014 amounted to more than EUR 34 billion, whichaccounted for an increase of 9.6% above the level of the first seven months of 2013.

Despite German Federal Labor Agency data showed that the number of unemployed people rose aseasonally-adjusted 12,000 to 2.92 million in September, the seasonally-adjusted unemployment rateheld steady at 6.7%, the lowest reading in decades. Geopolitical tensions and the Ukrainian crisis mayhave contributed to the lower figure for September. Unadjusted readings for unemployed personsshowed a drop of 41,144 units in September, corresponding to a 1.4% decline month on month. Separatedata from the Federal Statistical Office (Destatis) showed the number of people with jobs rose by aseasonally adjusted 25,000 units to a new record high in August, with a 0.8% increase year on year.

Germany’s labor market remains healthy, whereas the euro area (EA18) labor market remains shaky.According to Eurostat, the seasonally-adjusted unemployment rate for the Eurozone region was 11.5% inAugust, 2014, with the youth unemployment rate8 at 23.3% (the unemployment rate for the same agegroup in Germany decreased to 6.0% in September from 6.8% in August) The labor market in Germanyappeared to remain in a healthy state as the unemployment rate might have reached its equilibriumlevel. Additional structural reforms would be needed to lower the unemployment rate further ascompanies operating in the high-tech sector experience difficulties in finding qualified workers, thushaving to resort to hiring from abroad.

In this respect, as part of the Europe 2020 strategy, the European Union is struggling to increase theshare of the EU population in the 30- to 34-year age group with tertiary educational attainment to a totalof 40%. In 2013, for the entire EU, the percentage of highly qualified people was 37% for the same agegroup, a rise of six percentage points above the 2008 reading. Sixteen EU-member states hit the 40%mark in 2013. Ireland and Luxembourg held the top spot with a 52.6% and a 52.5% share, respectively,while Italy bottomed out at 22%. Germany’s rank for 2013 in terms of tertiary educational attainment wasbelow the EU average. About 33% of the population in Germany aged between 30 and 34 years hadcompleted tertiary education in 2013.

According to a recent study by researchers at the University of Mannheim, immigrant firms have beencontributing to create 2.2 million jobs in Germany. The number of self-employed immigrants hasclimbed by 178% over the past 20 years. The reading of self-employed immigrants is more than four

8The youth unemployment rate is the number of people aged 15 to 24 unemployed as a percentage of the labour force of the same age.

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times higher the growth rate among native Germans, which stood at 38% according to the study. Out ofthe 750,000 immigrants, about 13% come from Poland and 12% from Turkey. The study clarifies how thebusinesses that immigrants start are not merely döner stands, street food shops and grocery stores assomeone may believe. Rather, one in four immigrant-owned businesses are classified as “knowledge-intensive services” that require skilled workers. Also, almost one-third of immigrant-owned companies areincluded within the categories of hospitality and commerce. A study published earlier in May this year bythe Institute für Mittelstandsforschung (IfM) showed that the surge in foreign businesses could beascribable to a loosening of employment rules in Germany for citizens of eastern European countries thatjoined the EU in 2004.

8 The outlook for Germany

Despite losing momentum in the second quarter, and recent uncertainties in the third quarter, economicgrowth in Germany in the last part of the year is expected to keep up to the 1.4% GDP growth rateforecast (on Oct. 7, 2014, the IMF cut its 2014 GDP growth forecast for Germany to 1.4% from 1.9%, andits 2015 forecast to 1.5% from the previous reading at 1.7%). Employment levels along with real wageincreases should sustain economic growth in Germany as disposable household income is expected toboost consumption growth. Salary negotiations in Germany for the current year have concluded.Collective agreements between the parties in many economic branches agreed on pay rises of 3.0% ormore for 2014. Many wage settlements contain pay rises also for 2015, which are generally lower. In thelabor market, the introduction of an hourly minimum wage of 8.50 euros as of Jan.1, 20159 is expectedto sustain wage growth dynamics. The October, 2014 edition of the IMF’s World Economic Outlookestimates private consumer expenditure in Germany rising by 1.1% in 2014 (up from 1.0% in 2013) and1.3% in 2015.

At the same time, planned infrastructure investments (committed infrastructure investment by Germanyamounts to 0.2.% of GDP over the next four years) along with unabated export levels of investmentgoods in the US, UK and EU trading partners will contribute to Germany’s GDP growth. As the monetarystance by the U.S. Fed progressively shifts to hawkish, a depreciation pattern of the euro is expected toboost export levels of the country. Germany recently ranked above China as it held the top spot in theworld’s country ranking by trade surplus.

After decades of declining public and private investment in domestic infrastructure and machinery andequipment, Germany is poised to a shift in government policy, should a faltering growth patternmaterialize. As urged in its October, 2014 World Economic Outlook, “in countries with infrastructureneeds, the time is right for an infrastructure push. Borrowing costs are low and demand is weak inadvanced economies, and there are infrastructure bottlenecks in many emerging market and developingeconomies.” In particular, the IMF clarifies how “debt-financed projects could have large output effectswithout increasing the debt-to-GDP ratio, if clearly identified needs are met through efficient investment.”Earlier in 2014 the IMF urged the German government to spend 50 billion euros to stimulate economicgrowth in Europe.

9It applies to all workers, with few exceptions. In a two-year transition period gross hourly earnings under 8.50 euros are allowed for current

minimum wage contracts. This applies, for example, in Germany in the meat industry and in the hairdressing sector, in eastern Germany andBerlin in the field of temporary staff in the East German building cleaning.

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One of the limitations of the German economy remains the fixed capital formation and the level ofinvestments. The share of gross fixed capital formation (GFCF) to GDP stood at 19.87% at the end of thesecond quarter of this year. The same percentage was above 23% in the early nineties. Germany’s latestreading sets against an average of about 21% for major developed countries. The contribution of grossfixed capital formation in machinery and equipment to the GDP level in the current year remains athistorical lows and anchored to the 6.0% mark (the reading at the end of the second quarter was at6.35%). The share of GFCF in machinery and equipment was at 10.02% in 1991. Similarly, GFCF inconstruction as a percentage of GDP declined to 9.99% at the end of the second quarter from anaverage reading of 13.27% in the nineties.

IMF’s projections of GFCF at the end of 2014 and for 2015 indicate for Germany annual percentagechanges of 3.2% and 3.1%, respectively. The readings for Germany sets against averages in 2014 and2015 for advanced economies projected at 3.1% and 4.2%, respectively. GFCF annual percentagechanges estimated for the US, UK, and Japan stood at 3.9%, 9.3%, and 4.3% in 2014, respectively. For2015 IMF estimates GFCF annual rates of change to 6.9%, 5.6% and -0.2% for US, UK, and Japan,respectively.

FIGURE 15A: GROSS FIXED CAPITAL FORMATION AS A% OF GDP – 1970-Q2, 2014

FIGURE 15B: LABOR MARKET. DEVELOPMENT OF REALEARNINGS, NOMINAL EARNINGS AND CONSUMER PRICES– Q1, 2008-Q2. 2014

Source: STOXX calculation on Destatis data Source: Destatis data a

Indeed German companies are quite active in direct investment abroad, with considerable activity inChina and Eastern Europe. IMF projects net direct investment of Germany to the tune of 42 billion USdollars and 43 billion US dollars at the end of 2014 and 2015, respectively, up from 30.5 billion US dollars

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

23.0%

25.0%

27.0%

2Q 2

014

3Q 2

013

2012

2009

2006

2003

2000

1997

1994

1991

1988

1985

1982

1979

1976

1973

1970

GFCF in ConstructionGFCF in Machinery & EquipmentGFCF

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Index of real earningsIndex of nominal earningsConsumer Price Index

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for 2013. In the August edition of its monthly report, the Deutsche Bundesbank showed that net capitalexports amounting to 16 billion euros were registered in the form of direct investment in the secondquarter of 2014.

The largest component of direct investment was the relatively high level of funding provided by Germanenterprises to their subsidiaries abroad (23 billion euros for the second quarter). Deutsche Bundesbankclarifies how, during the second quarter, Germany’s relations with Sweden, Switzerland, Luxembourg andthe United Kingdom were highly significant. While German direct investment mainly took the form ofequity capital increases in Sweden (7 billion euros) – namely in vehicle manufacturing – and Luxembourg(3 billion euros), the preferred way was through direct investment loans in Switzerland (3 billion euros)and the UK (2 billion euros). Foreign investors increased marginally their activity in Germany in thesecond quarter (7.5 billion euros), with capital mainly being accumulated via intra-group loans (7 billioneuros). Netherlands (5 billion euros) accounted for the largest portion of the foreign direct investment viaintra-group loans.

Interest rate expectations appear to be muted in the short run, forward guided by a dovish monetarystance of the European Central Bank. The German yield curve featured an 11-bps yield curve bearsteepening for the period Aug. 29, 2014-Oct. 9, 2014, factoring in expectations of higher interest rates inthe future. The front-end of the interest rates term structure (-4 bps) was shaped mainly by concernsabout economic growth in Europe as the announced ECB targeted longer-term refinancing operations(TLTRO) and the asset purchase program aim at fending off a deflationary pattern in the Eurozone.

The euro break-even inflation rates, i.e. the five-year forward rates five years ahead - one of the ECB'spreferred measure of the market's inflation expectations, which shows markets expectation forecasts for2024 inflation to be in 2019 — declined to a new low of less than 1.80%. Flight to quality drivers triggeredby geopolitical tensions and implications arising from the U.S. bombing campaign against Islamic Statefighters, which started earlier in August, also weighed on the steepening of the curve. Yields on two-yearGerman government benchmarks entered into negative territory on August 11. When compared to theend of 2013, the slope of the German yield curve, as measured by the yield differential between thirty-and two-year German government bonds, bull flattened by 67 basis points for the period until Oct. 9,highlighting expectations that short-term interest rates will remain low for a long period. Despite front-end German yields entered into the negative territory earlier during the year, the drivers above sustainedthe demand for German government paper at an unabated pace. As potential impacts on corporateearnings due to the Russian crisis and safe-haven drivers took their toll, substitution effects in investors’portfolios triggered by weaknesses in stock markets were observed in financial markets.

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FIGURE 16: GERMANY YIELD CURVE, OCT. 9, 2014, AUG. 29, 2014, & DEC. 31, 2013

Source: STOXX calculations on market data

9 Overview of the German securities market

The DAX® Index tracks the segment of the largest and most important companies – known as blue chips– on the German equities market. It contains shares of the 30 largest and most liquid companiesadmitted to the FWB® Frankfurt Stock Exchange in the prime standard segment, representingapproximately 80% of the aggregated prime standard’s market capitalization. The DAX® is primarilycalculated as a total return index. It is one of the few major country indices that also takes dividend yieldsinto account, thus fully reflecting the actual performance of an investment in the index portfolio. As aresult, on a like-for-like basis, for any performance comparison, we should take into account, alternatively,the index stripped of the dividends component, i.e. the “DAX Kursindex”, or consider a total return versionof other stock market benchmarks.

Despite its diversification across sectors, the exposure of the DAX is weighted towards industry sectorsthat are sensitive to the economic cycle. Chemicals, Automobiles and Parts , and Industrial Goods &Services account for about 56% of overall sector allocation.

-0.5

0

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1.5

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1 month 3 month 6 month 1 year 2 year 3 year 5 year 10 year 20 year 30 year

Yiel

d

Maturity

29-Aug-2014

9-Oct-2014

31-Dec-2013

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FIGURE 17: DAX® SECTOR BREAKDOWN, JUN. 2014

Source: STOXX data

With 689 companies - 610 domestic and 79 foreign - listed at Deutsche Börse trading centers, and amarket capitalization of 1,359 billion euros (1,790 billion US dollars) at the end of August, the Germanstock market held the seventh place in the ranking of worldwide stock exchanges by dimension. However,compared with German GDP at current prices (unadjusted figures) for year-end 2013 year, the overallstock market cap is relatively low at 48.26%.

A recent analysis of the statistics on securities investments, published by Bundesbank in its Septemberedition of the Monthly Report, highlights recent trends in the ownership structure of listed German publiclimited companies since 2005. The ownership structure of the German stock market shows a markeddegree of internationalization. After declining to a minimum of 51.6% at the heart of the financial crisis,when international investors worldwide repatriated their assets, as the level of uncertainty and the liquidityneeds weighed on asset allocation decisions, the share of German stocks held by foreigners hasincreased again recently, hitting more than 57% at the end of May. As for the DAX, the foreign share iseven higher. Foreign investors in DAX constituents rose from 55.7% in 2005 to 63.7% in May 2014.According to Bundesbank findings, liquidity drivers, a high level of information transparency and the highcompetitiveness of the internationally orientated companies weighted in the index, have made DAXcompanies particularly attractive to foreign investors. Foreign investors domiciled in EU countries (33.8%)accounted for the largest stake in the DAX ownership structure. USA was the runner-up with a share of16.5%.

Chemicals24.2%

Automobiles & Parts18.0%

Industrial Goods &Services13.6%

Insurance9.8%

Technology7.6% Utilities

5.4%

Telecommunications4.9%

Others16.5%

Other26.8%

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FIGURE 18A: OWNERSHIP STRUCTURE OF GERMANLISTED COMPANIES

FIGURE 18B: OWNERSHIP STRUCTURE OF DAXCOMPANIES

Ownership ( in % terms) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Nationals 45.5 46.4 41.2 48.4 45.4 44.9 45.8 44.6 42.8 42.9of which: Households 13.3 11.2 10.0 10.3 12.6 12.8 13.1 12.2 11.4 11.8 Institutional Investors 29.8 32.7 29.4 36.1 31.1 30.6 31.1 30.3 29.6 29.4 Non-financial investors 12.7 16.1 15.8 22.9 19.4 19.2 18.7 18.3 18.9 18.3 Financial Investors 17.2 16.6 13.6 13.2 11.7 11.4 12.3 12.0 10.7 11.1 Banks 4.7 4.7 3.1 3.5 2.6 2.3 2.2 1.9 2.1 2.7 Investment Funds 8.0 7.7 5.8 5.3 5.9 6.2 6.9 6.8 6.4 6.3 Insurance companies 2.6 2.5 2.5 2.1 2.1 1.9 1.5 1.6 0.8 0.9 Other financial investors 1.8 1.7 2.2 2.3 1.1 1.0 1.9 1.7 1.5 1.3

Foreigners 54.5 53.6 58.8 51.6 54.6 55.1 54.2 55.4 57.2 57.1

Ownership (in % terms) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Nationals 44.1 41.9 35.1 43.9 36.9 36.5 38.1 36.6 35.4 36.3of which: Households 14.4 12.2 10.6 11.5 13.7 13.9 14.3 13.7 12.7 12.9 Institutional Investors 27.1 27.2 22.3 30.0 21.1 20.9 21.8 20.9 21.0 21.7 Non-financial investors 7.6 8.8 9.3 17.8 10.1 10.2 10.2 9.6 9.7 9.8 Financial Investors 19.5 18.4 13.0 12.2 11.0 10.7 11.7 11.3 11.2 11.9 Banks 6.3 5.8 3.3 3.5 2.3 2.0 2.2 2.1 2.7 3.3 Investment Funds 10.7 10.4 7.6 7.3 7.6 7.7 8.7 8.5 8.0 7.7 Insurance companies 1.7 1.6 1.7 1.0 0.9 0.8 0.7 0.6 0.4 0.5 Other financial investors 0.8 0.6 0.5 0.4 0.2 0.2 0.1 0.1 0.2 0.3

Foreigners 55.9 58.1 64.9 56.1 63.1 63.5 61.9 63.4 64.6 63.7of which: EU (ex Germany) 29.5 30.9 35.2 31.3 34.6 32.4 27.9 32.7 34.6 33.8 Switzerland 5.0 4.3 4.2 4.0 4.9 5.3 5.4 5.5 5.2 5.2 USA 13.1 15.0 16.8 14.2 15.9 18.6 20.7 16.9 16.4 16.5 Rest of the World 6.3 5.4 5.5 5.0 6.5 7.0 6.7 7.5 7.8 7.6

Source: Deutsche Bundesbank September 2014 (data for 2014

are at the end of May, yearend for the remaining periods;

weighting by market cap).

Source: Deutsche Bundesbank September 2014 (data for 2014 are

at the end of May, yearend for the remaining periods; weighting by

market cap).

At the end of May 2014, 57.1% of the market value of all listed German equities was held by foreigninvestors, while domestic investors accounted for 42.9% of the overall market cap. Among the categoryof domestic investors, 29.4% of the overall market cap of German stocks was owned by institutionalinvestors, which include banks, mutual funds, insurance companies and other non-financial corporations.At the same time, domestic households accounted for 11.8% of the market value of German stocks. Thepercentage of German equities held by domestic investors declined 11.3% since 2005 — after bottomingout to 10.0% in 2007 — a trend that the Bundesbank's report attributes to the decrease in households'equity holdings. Among domestic investors invested in DAX companies, institutional investors are by farthe largest group of investors with a share of 21.7%, down from a peak of 30.0% at the end of 2008.

A shift within the institutional investors sector can be observed. Financial investors in general (down35.5% to 11.1% in May, 2014 from 17.2% in 2005) and banks in particular (down 42.6% for the sameperiod from 4.7% to 2.7%) have reduced their relative holdings of German equities since 2005 andduring the crisis. Changes appear to be primarily driven by increased regulatory requirements. Conversely,non-financial institutional investors such as holding companies have ramped up their ownership ofGerman stocks from 12.7% at the end of 2005 to 18.3% at the end of May, 2014.

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Ownership data offer insights into investors’ preferences. One finding of the Bundesbank report is thefundamental relationship between a public limited company's size and its ownership structure. Domestichouseholds have a particular preference for shares of smaller companies. Domestic householdspreferences are believed to be partly explained by their bias toward local firms, which they are familiarwith and for which they can even tolerate returns lower than a market benchmark. Conversely, bothdomestic financial investors and non-resident investors exhibit a clear bias toward larger publiccompanies.

The German stock market remains highly sensitive to geopolitical tensions relating to the Ukrainian crisis.Escalating tensions in Ukraine took their toll particularly during the summer season. Among others, theDAX Index - whose corporate constituents have strong trade business relations with Russia - recordedlosses on August 28 amid reports Russian troops had crossed the border to fight alongside separatists.

More recent asset flows data appear to support early evidence that the German stock market might havelost investment appeal in the international investment arena. We believe that money flows readingsreflect temporary allocation of investors’ portfolios as geopolitical tensions and concerns about corporateprofitability dragged on market sentiment. According to the latest Lipper estimates on EMEA investmentfunds asset flows data, Germany’s domiciled collective investment funds recorded net outflows to thetune of 3.8 billion euros for September, 6.6 billion euros net inflows year to date on September 30th and15.3 billion euros positive money flows for the one-year period till the end of September. This compareswith net inflows of 6.9 billion euros for the one-year period ended Sep. 30, 2014. The one-year moneyflows reading at the end of September, 2014 represents about a 122% increase compared to the sameone-year period a year earlier. As global markets entered into the red at the end of July, after staying on arising mode for most of the month, and European stock markets featured dismal performance thereafter,Germany mutual equity funds posted a 0.5% negative return month on month in September. Theyrecorded a negative 4.6% return for the three-month period ended Sep. 30, 2014, -2.2% year to date anda healthy 7.4% positive performance for the one-year period, at the end of September.

According to the latest data on the investment activity in the German securities market published by theDeutsche Bundesbank, activity in the German stock market ramped up significantly in the secondquarter. Domestic corporates issued new shares totaling 10 billion euros, the bulk of which were listedequities. The majority of the issuance was associated with a capital increase by LANXESS AG, one of the30 constituents of the DAX, which decided in May to increase the share capital of the company by 10%,excluding the subscription rights of the shareholders. The increase of the share capital by a nominalamount of 8,320,266 euros was against the issuance of 8,320,266 new, no par-value bearer shares inthe company, which carried full dividend rights for the business year 2013.

The volume of foreign equities outstanding in the German market climbed by 13½billion euros for thesame quarter. Equities were bought mainly by domestic non-banks (13 billion euros) and foreigninvestors (7.5 billion euros). Domestic credit institutions purchased stocks to the tune of 3 billion eurosDomestic investors mainly focused their investment activity on foreign shares. After posting 23.5 billioneuros in net inflows in the first quarter, domestic investment funds recorded 14 billion euros in net inflowsfor the second quarter. Specialized funds reserved to institutional investors (11.5 billion euros) accountedfor the large part of the money flows during the quarter.

With a total market cap of 932.64 billion euros at the end of August, 2014, the DAX accounts for about69% of the overall market cap of all domestic equities listed on the Frankfurt Stock Exchange. When

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taking into account all stocks listed on the Eurozone stock exchanges, the DAX Index accounted for13.6% of the overall market cap at the end of August. The relative market cap of the DAX Indexdecreases to 11.4% when considering all equities listed on European stock exchanges, including the SIXSwiss Exchange and the Borsa Istanbul. Fundamental data-driven modelling apart, the assessment of therelative stock market caps of regional markets is relevant for those equity investors whose strategic assetallocation is determined by relative market cap. Extending the comparison to the US stock market, thetotal market cap of the DAX Index at the end of August compares against an overall market cap of theS&P 500 TR to the tune of 13.96 trillion euros (converted from the USD reading at the EUR-USD month’sclose cross rate). The average market cap of the DAX was 31.09 billion euros on August 29. That readingcompares with an average market cap for the S&P 500 TR of 27.83 billion euros (converted from theUSD reading at the EUR-USD month’s close Reuters-WM cross rate).

The charts below compare estimates of selected valuation metrics and fundamental ratios for the DAXand the S&P 500 for the 12 months ending Dec. 31, 2014 and Dec. 31, 2015.

FIGURE 19A: DAX INDEX FUNDAMENTAL HIGHLIGHTS –DEC. 31, 2014 (EST.)

FIGURE 19B: DAX INDEX FUNDAMENTAL HIGHLIGHTS –DEC. 31, 2015 (EST.)

Source: Bloomberg Source: Bloomberg

The DAX remains attractively priced compared to historical valuation metrics and in relative terms. Bothreturn on equity and return on assets for the DAX are expected to grow in 2015 compared to 2014readings. The dividend yield on the DAX will continue to remain anchored to solid historical standards. Atthe same time, dividends are projected to reward investors above S&P500 readings for both the currentyear and the next.

13.38

1.63

2.992.64

10.80

0.0

5.0

10.0

15.0Price/Earnings

Price/BookValue

Dividend YieldReturn onAssets

Return onEquity

11.87

1.51

3.312.70

11.39

0.0

5.0

10.0

15.0Price/Earnings

Price/BookValue


Return onEquity

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FIGURE 20A: S&P 500 TR INDEX FUNDAMENTALHIGHLIGHTS – DEC. 31, 2014 (EST.)

FIGURE 20B: S&P 500 TR INDEX FUNDAMENTALHIGHLIGHTS – DEC. 31, 2015 (EST.)

Source: Bloomberg Source: Bloomberg

Assets under management (AuM) of long-only ETFs products tracking the DAX (including the DAXKursindex) listed on the XTF segment of the Deutsche Börse Group amounted to 21.95 billion euros atthe end of August, with an increase of 4.18% and 0.24% month on month and year-to-date, respectively.Conversely, despite a 16.87% annual return contributed positively to the asset growth, AuM of long-onlyETFs products tracking the DAX at the end of August decreased 5.67% compared to the correspondingperiod a year earlier. The Xetra order book turnover for those ETFs pegged to the DAX index climbed 46%month on month in August to the tune of 3.31 billion euros. DAX ETFs accounted for more than 30% ofXetra order book turnover in August, with the iShares Core DAX UCITS ETF (DE) only holding a 15.4%market share in order book turnover terms. The Xetra order book turnover for long-only ETFs tracking theDAX soared more than 46% and about 88%, respectively, year to date and year on year on August 29.

The iShares Core DAX UCITS ETF (DE) recorded, in the past few months, significant turnover over-the-counter (OTC), suggesting the existence of significant trading activity at institutional level and throughstructure products. According to data from Deutsche Börse, the iShares DAX ETF posted 2.63 billioneuros OTC turnover in August, with a 173.53% increase month on month. OTC turnover was highlysignificant in August as it accounted for more than 156% of Xetra turnover.

16.73

2.601.963.02

14.95

0.05.0

10.015.020.0Price/Earnings

Price/BookValue


Return onEquity

15.07

2.40

2.123.32

15.80

0.05.0

10.015.020.0Price/Earnings

Price/BookValue


Return onEquity

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The same ETF ranked 14 in the global ranking of exchange traded product by AuM, largely dominated byETFs pegged to US stock market indices (namely the SPDR S&P 500) and emerging marketsbenchmarks.

Also, the iShares Core DAX UCITS ETF (DE) held the top spot in the ranking of European exchange-traded products by average daily trading volume.

10 Performance Analysis of DAX

The main function of the DAX® Index is to provide investors with easy, transparent and fast access toinvestments in the German equity market, also via index derivatives. Thus, the index is designed to beideally suited as an underlying for derivatives and, at the same time, to provide a representative picture ofthe German equity market. The index constituents are chosen according to rules-based criteria: marketcap and exchange turnover. The 30 stocks contained in DAX® represent around 80% of the marketcapitalization listed in Germany. In addition to the construction industry, all sectors with influence on theGerman economy are represented, i.e. the automotive industry, banks, the technology sector and utilitiescompanies. Deutsche Börse has been calculating the DAX® since Jul. 1, 1988 (at that time DeutscheBörse was still known as the Frankfurt Stock Exchange). The index was developed together with theAssociation of German stock exchanges (Arbeitsgemeinschaft der Deutschen Wertpapierbörsen) and theBörsen-Zeitung newspaper.

To allow investors to make more targeted investment decisions in specific industries, Deutsche Börse alsocalculates sector indices for the Prime Segment and for an extended representative portfolio comprisingall companies listed in the Prime, General and Entry Standard. Sector indices distinguish between listedcompanies and track the performance of individual sectors. The nine supersector indices, which are fullyinvestable, meet the statutory requirements for fund investments (UCITS) and are specifically geared tothe tradability of the index portfolio. With the DAX® supersectors, Deutsche Börse has aggregated a totalof 18 sectors in nine big, new supersectors. These include the most liquid companies on the PrimeStandard from Utilities, Telecommunications, FIRE (Finance, Insurance and Real Estate, i.e. companiesactive in the broad financial sector, such as insurance companies, banks, stock exchanges and otherfinancial service providers), Industrials, Information Technology, Pharma & Healthcare, Basic Materials,Consumer Goods and Consumer Services with a daily exchange turnover of at least 1 million euros. Sectorallocation is based on a company’s sales focus. In the event that this focus changes, the company inquestion can be removed from one sector and included in another at the next rebalancing date.

In order to cater for style investing strategies, Deutsche Börse also calculates medium- and small-sizedcap-weighted indices. The MDAX® Index contains 50 medium-sized German companies, as well asforeign companies operating primarily in Germany from traditional industrial sectors. These companieslag behind the 30 DAX® stocks in terms of market cap and exchange turnover. Therefore, the indextracks the performance of mid-caps, the medium-sized industrial stocks. MDAX® companies are strong,solid brand names or highly specialized leaders in their field with constant earnings development. Nocompany is allowed to account for more than 10 percent of the index. Historically, the MDAX® hasreturned constant above-average performance, and became the first German stock exchange index toexceed the 10,000 point mark in February, 2007.

SDAX® is the selection index for the 50 stocks that follow the companies included in the MDAX® in termsof market cap and order book turnover. Thus the SDAX® Index tracks the small-cap segment from the

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industrial sectors of the German market. A total of 12 sectors are represented on the SDAX®, includingthe media, chemical and transport industries. The industrial and financial services sectors each make upone third of the index.

On the volatility side, Deutsche Börse calculates the VDAX-NEW® Index, which is an indicator ofderivatives market expectations regarding potential fluctuations on the DAX® – the implied volatility.VDAX-NEW® shows the expected volatility of DAX® over the next 30 days as an annualized percentage.The index is based on at-the-money and out-of-the-money DAX® options traded on Eurex®. In additionto the main VDAX-NEW® Index, eight sub-indices for each Eurex® DAX® options contract with a maturityof between one month and two years are calculated.

Historically implied volatility typically rises when markets fall and vice versa, although the pattern of thatrelationship appeared to have changed in the market conditions prevailing earlier this year, when liquiditydrivers and information flows arrival, more than fundamentals and macro readings, largely accounted forstock market movements. The negative correlation between volatility and stock markets can be easilyexplained by the fact that during market disturbances investors buy protection for their portfolios,pushing upwards options prices and hence implied volatilities. On average, implied volatility exceedsrealized volatility although there are noticeable exceptions.

FIGURE 21: DAX® (PR), DAX® (TR), AND VDAX-NEW®

Source: STOXX data from Oct. 5, 2009 to Sep. 30, 2014

Following a solid performance in 2013 (+25.48%), the DAX TR remains in negative territory year-to-dateto October 9 (-5.73%) as markets retraced from a fresh all-time high on July 3 at 10,029.4 amid worriesabout domestic GDP growth rates, deflationary patterns, economic growth in German trade partners andgeopolitical tensions in the Crimean region and the Middle East. For the same period, the DAX TR Indexunderperformed by 670 bps and 1,613 bps against the EURO STOXX 50 TR and the S&P 500 TR in euroterms, respectively. Nonetheless, in the relative comparison against the US benchmark, a 7.74% euro FX

10

15

20

25

30

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2'000

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Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14

DAX® (PR) EUR (left scale) DAX® (TR) EUR (left scale) VDAX-NEW® EUR (right scale)

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rate depreciation against the US dollar should be taken into account. In Europe, throughout the summer,mounting concerns about Russia's supply of oil and gas to the region hit investor sentiment, triggeringintra-day volatility spikes across all asset classes.

Implied volatility as represented by the VDAX-NEW® Index spiked to a five-month high on August 8(20.68 mark), as market fears over Russia worsened on August 6, on reports that the country wasamassing battalion groups on the Ukrainian border, potentially to invade the country. Year-to-date toOctober 9, implied volatility as reported by the VDAX-NEW® rose 29.58%. Despite the negativeperformance year-to-date, the DAX TR Index posted positive returns for the one-, three-, and five-yearperiods ended October 9 to the tune of 4.78%, 63.67% and 58.67% respectively. While the German stockmarket benchmark underperformed the EURO STOXX 50 by 422 bps for the one-year period endedOctober 9, it outperformed the same Eurozone benchmark by 518 bps and 2,756 bps for the three- andfive-year periods, respectively. Although the DAX TR and the DAX PR indices returned significantperformance differences, the time series of returns of the two indices remain highly correlated, with theexception of a few marginal spikes. Similarly, the volatility patterns of the price and the total returnindices mimicked each other throughout the time period considered in the analysis.

FIGURE 22: DAX PR VS. DAX TR - LONG RETURN CORRELATION & ANNUALIZED VOLATILITY

Source: STOXX calculations on DAX data from Nov. 4, 2009 to Sep. 30, 2014

5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%55.0%

0.950.960.960.970.970.980.980.990.991.001.00

Nov-09 Jul-10 Mar-11 Nov-11 Jul-12 Mar-13 Nov-13 Jul-14

20-day Rolling Window Log Return Correlation DAX PR vs. DX TR (left scale)Annualized 20-day Rolling Window Volatility DAX® (PR) EUR (right scale)Annualized 20-day Rolling Window Volatility DAX® (TR) EUR (right scale)

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4070

100130160190220250280310340370

Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14

Basic Materials Consumer Goods Consumer Services

FIRE Industrials Information Technology

Pharma & Healthcare Telecommunications Utilities

65.99

142.34152.40174.35180.28217.24245.39267.82303.36

FIGURE 23: DAX® SUPERSECTOR PERFORMANCE INDICES

Source: STOXX data from Sep. 9, 2009 to Sep. 30, 2014. Indexed performance rebased at Sep. 9, 2009 at 100.

A performance analysis by sector, for the period Sep. 9, 2009-Sep. 30, 2014, shows thatTelecommunications held the top spot in the DAX Supersector Performance Indices league table, as theindex posted a 203.36% return.

Utilities, being a defensive sector, ranked at the bottom of the supersector performance league table as itdid not benefit from market rally factors over the same period, mainly driven by quantitative easingmeasures and central banks’ ultra-loose monetary policies on both sides of the Atlantic. Conversely,Utilities outperformed year-to-date at the end of September as the Supersector index returned a 13.66%performance. In the last few months, the outperformance of the sector matched the risk-off drivers andearly portfolio rotations into defensive sectors as geopolitical tensions, potential impact on corporateearnings arising from sanctions on Russia and concerns about the economic recovery in the Eurozonetook their toll on investors’ preferences. Consumer goods ranked at the bottom of the year-to-dateperformance league table as the sector posted a negative 9.25% return. Year on year till September 30,Telecommunications held the top spot returning 23.31%. The FIRE Supersector Index (+18.01%) andPharma & Healthcare (+17.94%) were the runners up for the same period. Industrials, reflecting concernsabout the sustainability of the business cycle, bottom-performed year on year at the end of September asthe Supersector Index posted a 2.45% performance.

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FIGURE 24: DAX® SECTOR PERFORMANCE INDICES, ALL FINANCIAL SERVICES VS. ALL BANKS

Source: STOXX calculations on DAX data. Indexed performance rebased at Sep. 9, 2009 = 100 & rolling window volatility, Oct. 10, 2009 to Sep.

30, 2014

Breaking the FIRE a further level down at sector level, it is evident how the banking sector detracted fromthe performance of the supersector for the overall period. Confidence in the European banking sectorremains fragile following the bailout of the Portuguese Banco Espirito Santo Stocks earlier this year, andpotential implications arising from the decision by Europe and then US to sanction Russia's largest banks(and ban trading and capital markets access). Last but not least, the banking sector remained volatile asEuropean banks' stress test results, due for publication before the end of October, may reveal a situationworse than what originally hoped for, with capital shortfalls emerging across the board.

For the period Sep. 9, 2009-Sep. 30, 2014, the DAX All Banks sector index lost 42.80%, against a gain of38.03% for the DAX All Financial Services sector. Year-to-date at the end of September, All Banksremained in negative territory (-8.44%), while the All Financial Services posted a solid double-digit return(+13.60%). Although of a less negative magnitude in relative performance terms, the picture does notchange for the one-year period ended Sep. 30, 2014. The DAX All Banks sector index posted a negative -1.15% against a positive 16.97% for the DAX All Financial Services sector index.

A simple regression analysis performed between previous periods vs. next period lagged dependentvariables for both log return and volatility of DAX constituents showed better predictability characteristicsfor the volatility variables. Three different time periods were taken into consideration, i.e. Jan. 2, 2004-Sep. 15, 2014, Jan. 2, 2007-Sep. 15, 2014, and Jan. 1-Sep. 15, 2014 to estimate both in-sample and out-of-sample (until Dec. 13, 2014) stock price returns and volatilities.

5.0%11.0%17.0%23.0%29.0%35.0%41.0%47.0%53.0%59.0%65.0%71.0%77.0%

30405060708090

100110120130140150

Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14

DAX sector All Financial Services (left scale)DAX sector All Banks (left scale)Annualized 20-day Rolling Window Volatility DAX sector All Financial Services (right scale)

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The model specifications of the multiple linear regressions that were tested are as follows:

, = + , , + , , + , , = 1,…… ,30,20 , = + , 20 , + , 20 , + , , + , , + , ,= 1,…… ,30,where:r denotes the natural logarithm of returns for each individual DAX constituents,VolRol20d denotes the 20-day annualized rolling window realized volatility of returns for each individualDAX constituents,Vol denotes the daily trading volume for each DAX constituents.

Taking into account long-term returns implies a notion of long-range dependence, however testingrandom walk10 hypotheses for the DAX Index’s components falls beyond the scope of this paper. Still it isa controversial debate whether future price changes can be forecasted by past price changes alone.Regression results show better predictability characteristics for the volatility measure, which has beenderived as a 20-day rolling window standard deviation of returns. In particular, the basic regression modelfor volatility includes the trading volume as an additional explanatory variable, whereby the volume isconsidered a proxy for new information flow/arrival and is linked to major events in stock markets. Asexpected, the contribution of the trading volume as an exogenous variable in the model was highlysignificant. Modelling volatility and volatility forecasting through the class of (ARCH) or (GARCH) modelsin order to capture serial correlation patterns of asset returns volatility falls beyond the scope of this paperand will be addressed in a separate research paper. Nonetheless, a better predictability of risk opens upthe potential for investors for risk-based approaches to investing in the German stock market.

Germany's DAX, the Eurozone's best-performing stock market in the five years since Lehman Brotherscollapsed, is lagging all other major markets so far this year. Risk aversion triggered by geopoliticaltensions, rather than company fundamentals, has driven stock market prices in Germany along adownward path. The discount at which the index and its components trade appear excessive. Germanstocks' recent underperformance has dragged the index price-to-earnings ratio down to a level not seensince September, 2013. The PE ratio closed at 13.74 on October 10. Stock markets appeared to factor in apotential impact on revenues arising from diminished exports to Russia and European trading partners.Market reaction appeared not to be justified by fundamentals, though. Still, as noted in the charts below,a relevant number of DAX constituents source their revenues from outside Europe for a significantportion of their aggregated sales.

10The random walk hypothesis, which is consistent with the efficient-market hypothesis, assumes that stock market prices evolve over time

according to a random walk, and thus cannot be predicted. There are three different forms of the random walk hypotheses, depending on thevarious levels of dependence that can occur between two asset returns at two different points in time. In particular, the random walk hypothesisgoes back to the notion of martingale, which is a stochastic process that contains the notion of a fair game. The origin of the martingale modellies in the history of gambling and the birth of the probability theory. In addition to denoting a horse’s harness strap or a spar under the bowspritof a sailboat, the term martingale also refers to a method of gambling in which the stakes are doubled after each loss. Back in the sixteencentury the Italian mathematician Gerolamo Cardano first proposed a basic theory of gambling in his book “Liber de Ludo Aleae” (The Book onGames of Chance).

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FIGURE 25A: DAX CONSTITUENTS - SALES EUROPE AS% OF 2013 TOTAL SALES

FIGURE 25B: DAX CONSTITUENTS - SALES EX-EUROPEAS % OF 2013 TOTAL SALES

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

Companies such as Bayer, BMW, Beiersdorf, Continental, Daimler, Fresenius SE, Infineon TechnologiesSE, LANXESS, Linde, Merck KGaA, SAP, Siemens and Volkswagen have recorded earnings per shareupward revisions and improved profit margin estimates at the end of the current year and the next. Inparticular, BMW, Continental, Daimler, Infineon, LANXESS and Volkswagen are estimated to post double-digit growth rates in both gross profit and adjusted EPS in 2014 and 2015.

The appendix at the end of the paper shows key highlights of estimated growth rates in companyfundamentals for the DAX constituents for the fiscal periods ending at Dec. 31, 2014 and Dec. 31, 2015.

The latest release of the ZEW11 indicator of economic sentiment for Germany showed how the indexdecreased for the 10th consecutive month, entering into negative territory for the first time since

11The ZEW survey polled 223 financial market analysts for the October-survey, which was conducted during the period 9/29-10/13/2014.

Analysts were asked about their expectations for the next 6 months. ZEW Numbers are percentages, while Balances refer to the differencebetween positive and negative assessments.

24.7326.38

32.0534.4334.86

38.5139.9940.0040.0040.7843.4944.0245.1645.1845.2947.86

53.5658.6358.8359.9761.6362.0463.2664.8765.7367.00

75.6479.90

95.7998.26

0.0 20.0 40.0 60.0 80.0 100.0

LANXESSSAP

VOLKSWAGENHENKEL

DAIMLERLINDE

FRESENIUSFRESENIUS MEDICAL

HEIDELBERG CEMENTINFINEON

ADIDASTHYSSENKRUPP

BAYERISCHE MOTOREN…BAYER

K+SSIEMENS

CONTINENTALDEUTSCHE BANK

DEUTSCHE BÖRSEMÜNCHENER RÜCK

MERCK KGAAALLIANZ

BASFDEUTSCHE LUFTHANSA

DEUTSCHE POSTDEUTSCHE TELEKOM

BEIERSDORFRWE

COMMERZBANKE.ON

75.2773.62

67.9565.5765.14

61.4960.0160.0060.0059.22

56.5155.9854.8454.8254.71

52.1446.44

41.3741.1740.03

38.3737.9636.74

35.1334.2733.00

24.3620.10

4.211.74

0.0 20.0 40.0 60.0 80.0

LANXESSSAP

VOLKSWAGENHENKEL

DAIMLERLINDE

FRESENIUSFRESENIUS MEDICAL

HEIDELBERG CEMENTINFINEON

ADIDASTHYSSENKRUPP

BAYERISCHE MOTOREN…BAYER

K+SSIEMENS

CONTINENTALDEUTSCHE BANK

DEUTSCHE BÖRSEMÜNCHENER RÜCK

MERCK KGAAALLIANZ

BASFDEUTSCHE LUFTHANSA

DEUTSCHE POSTDEUTSCHE TELEKOM

BEIERSDORFRWE

COMMERZBANKE.ON

STOXX LTD.


38

November, 2012. The index of economic expectations for Germany stands at -3.6 points (the index is thebalance) against a long-term average of 24.5 points. As clarified in the press release of the Octoberreading, geopolitical tensions and the faltering economic outlook in some countries of the Eurozoneappeared to have slowed growth expectations in Germany, contributing to the increased pessimismamong financial market experts. Expectations on the pattern of the DAX resembled the sentiment on thebroader macro picture for Germany, although the balance remained anchored in a territory above thehistorical low of 38.6 hit in November, 2011.

FIGURE 26: ZEW BUSINESS SURVEYS, STOCK MARKET INDICES, DAX, DEC. 2000 – OCT. 2014

Source: ZEW Zentrum für Europäische Wirtschaftsforschung GmbH

Despite pausing in late 2010 and early 2011, the DAX has been providing healthy and attractive dividendyield in excess of government bond yields since the financial crisis. The pattern between the two hasbeen diverging as interest rates globally remain at historical lows. Given its construction (it is calculatedby dividing the twelve-month dividend rate by the last price), the dividend yield stayed on a decreasingpattern since April, 2012 mainly due to a positive performance of the DAX Index. However, for the past,interpreting a decline in the price-dividend ratio as a mere price increase is a mistake as it does notaccount for a number of market restrictions existing in the country. In Germany, share buybacks werehighly restricted until 1998. As a consequence the volume of share repurchases was small. After thatdate, restrictions were lifted and a tax advantage was introduced. As a result, after April 1998, a relevantnumber of buybacks was announced by German corporations and dividend payments declined. In their2004 study, Hacketal and Zdantchouk (Hacketal, A. and A. Zdantchouk , “Share Buy-Backs in Germany.Overreaction to Weak Signals?”, 2004) analyzed a comprehensive sample of 224 buybackannouncements that took place between May, 1998 and April, 2003 and identified average cumulative

0

10

20

30

40

50

60

70

80

90

Dec-00 Jun-02 Dec-03 Jun-05 Dec-06 Jun-08 Dec-09 Jun-11 Dec-12 Jun-14

DAX Increase DAX No Change DAX Decrease DAX Balance

STOXX LTD.


39

abnormal returns around -7.5% for the thirty days preceding the announcement and around +7.0 % forthe 10 days following the announcement. By regressing post-announcement abnormal returns withmultiple firm characteristics, the authors provided evidence that supported the undervaluation signalinghypothesis but not the excess cash hypothesis or the tax-efficiency hypothesis.

The chart below plots the dividend yield of the DAX against the 10-year German government benchmarkfor the period Sep. 28, 2007-Sep. 30, 2014, along with the DAX TR Index. It is worth noting that in thecurrent low-interest rate environment attractive-yield investments are considered proxies for bonds bydividend investors, exposing them to potential changes in portfolio allocation in case an interest rate riseshould materialize.

FIGURE 27: DAX TR INDEX – DIVIDEND YIELD VS. GERMAN GOVERNMENT BOND BENCHMARK, SEP. 28, 2007-SEP. 30,2007

Source: STOXX, Thomson Reuters data

Given the recent stock market corrections in the Eurozone, DAX stocks remain attractively pricedin a historical perspective. Looking at the data in Figure 28, we can see that this statement holdsirrespective of which specific measure of fundamental value is used. Given solid fundamentals, thecurrent index level may offer opportunities to build stock market positions and economic sector exposureto the largest economy of the Eurozone, paving the way for locking in profits beyond the short term, whenclouds surrounding European and global markets dissipate.

3'000

4'000

5'000

6'000

7'000

8'000

9'000

10'000

11'000

0

1

2

3

4

5

6

7

8

Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14

German Government Bond Benchmark, 10-YR Yield, Bid Close (left scale)DAX TR Index, Dividend Yield (left scale)DAX TR Index (right scale)

STOXX LTD.


40

FIGURE 28: DAX TR INDEX - DIVIDEND YIELD, P/E RATIO, P/BV, SEP. 28, 2007-SEP. 30, 2014

Source: Thomson Reuters

A feel-good factor could potentially also be observed in stock markets, as the euphoria for the World Cupvictory might trigger relative outperformance of equity benchmarks against global peers. According to aGoldman Sachs analysis, which goes back to 1974, historically in the first month after a World Cup finalmatch, the victorious country’s stock market outperformed world markets by an average of 3.5%. Basedon historical evidence, all the winning nations experienced a rally except Brazil in 2002. At that timeBrazil was on the verge of a crisis as financial markets weighted lingering fiscal and current accountproblems, the crisis in neighboring Argentina, and the prospect that existing market-friendly economicpolicies could be overturned in case the left-wing candidate Luis Inácio Lula da Silva might win theelection. Market euphoria did not last for long though, as the victorious country’s stock marketunderperformed by 4% in the year following the victory. Conversely, runners-up underperformed againstglobal market benchmarks by an average 1.4% in the first month after the defeat and a relative 5.6%underperformance in the three months after. Following a two-year stock market collapse and currencystrong devaluation in 1990, Argentina was an exception to the trend above, as the country outperformedworld markets by 33%.

It appears Germany might be a typical case where history will not repeat itself. The chart below shows therelative indexed performance of the DAX vs. the S&P 500 TR and the Euro STOXX 50 TR for the periodJul. 11, 2013-Sep.30, 2014, i.e. one-year before and 57-trading days after the World Cup final match.Contradicting historical evidence from the Goldman Sachs analysis above, the chart shows how the DAXoutperformed the S&P500 TR and the Euro STOXX 50 TR in the very first few days after Germany’sWorld Cup victory. Relative performance against the S&P 500 TR and the Euro STOXX 50 TR enteredinto negative territory thereafter, until August 22 vs. the former index and August 4 vs. the latter,alternating short-lived bright spots during the period. After that, the DAX recovered, although it featureda mixed performance pattern. For the overall period Jul. 11, 2014-Sep. 30, 2014, the DAX underperformed

3'5004'0504'6005'1505'7006'2506'8007'3507'9008'4509'0009'55010'100

02468

1012141618202224

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14

DAX TR Index, Dividend Yield (left scale) DAX TR Index, P/E Ratio (left scale)

DAX TR Index, P/BV (left scale) DAX TR Index (right scale)

STOXX LTD.


41

the S&P500 TR and the EURO STOXX 50 TR by 2.67% and 4.37%, respectively. It will be interesting tomonitor whether the market will factor in for the DAX a feel-good factor beyond the short term, shouldgeopolitical tensions linked to the Ukraine crisis and the impact on both foreign trade activities andmarket sentiment arising from sanctions to Russia taper off.

FIGURE 29: RELATIVE INDEXED PERFORMANCE OF DAX INDEX ONE YEAR BEFORE/57 DAYS AFTER WORLDCHAMPIONSHIP FINAL MATCH

Source: STOXX calculation on market indices data

For the period Dec. 31, 2008-Sep. 30, 2014, the DAX TR (total return) posted an annual compoundreturn of 12.5%, while the DAX PR (price return) lagged behind at 8.5%. The same annual compoundfigures for the EURO STOXX 50 and the S&P 500 TR Index were 9.7% and 19.0%, respectively.A single sum of 1,000 euros invested at the end of December, 2008, would have returned 1,603 euros forthe DAX PR, 1,701 euros for the EURO STOXX 50, 1,970 euros for the DAX TR and 2,720 euros for theS&P 500 TR.

Conversely, a single sum of 1,000 euros invested at the end of December, 2008, with a series of regularmonthly contribution of 100 euros each would have returned 10,428 euros for the DAX PR, 11,195 eurosfor the EURO STOXX 50, 11,753 euros for the DAX TR, and 14,815 euros for the S&P500 TR.

94

96

98

100

102

104

106

108

110

5750433629221581-6-13

-20

-27

-34

-41

-48

-55

-62

-69

-76

-83

-90

-97

-104

-111

-118

-125

-132

-139

-146

-153

-160

-167

-174

-181

-188

-195

-202

-209

-216

-223

-230

-237

-244

-251

-258

Relative Indexed Performance DAX vs. S&P500 TRRelative Indexed Performance DAX vs. Euro STOXX 50 TR

Relative Indexed Performancerebased at 100 on Jul. 11, 2014

STOXX LTD.


42

FIGURE 30: TOTAL RETURN AT SEP. 30, 2014 OF A SINGLE SUM OF EUR 1,000 INVESTED AT THE END OF DEC. 2008


Results differ for the more recent period, indicating a different ranking of relative convenience amongindices. For the Dec. 30, 2011-Sep. 30, 2014 period, the DAX TR posted an annual compound return of18.8%, while the DAX PR lagged behind at 14.6%. The same annual compound readings for the EUROSTOXX 50 and the S&P 500 TR Index were 17.8% and 21.5%, respectively.A single sum of 1,000 euros invested at the end of December, 2011, would have returned 1,457 euros forthe DAX PR, 1,571 euros for the EURO STOXX 50, 1,606 euros for the DAX TR and 1,710 euros for theS&P500 TR.

Also, a single sum of 1,000 euros invested in the indices above at the end of December, 2011, with aseries of regular monthly contribution of 100 euros each would have returned 5,190 euros for the DAX PR,5,511 euros for the DAX TR, 5,706 euros for the EURO STOXX 50 TR and 6,095 euros for the S&P500 TR.

600800

1000120014001600180020002200240026002800

Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14

DAX 30 TR DAX 30 PR EURO STOXX 50 TR S&P 500 TR

2,720.48

1,969.63

1,701.01,602.5

STOXX LTD.


43

FIGURE 31: TOTAL RETURN AT SEP. 30, 2014 OF A SINGLE SUM OF EUR 1,000 INVESTED AT THE END OF DEC. 2011


From the chart above it is evident how money invested into the DAX TR gained a cumulated return higherthan the S&P 500 TR until May 22, 2012 and after Aug. 20, 2012 until the end of July 2014, when theimpact on the real economy and the market and business sentiments of the Ukrainian crisis, the Russiansanctions and the geopolitical risks in Middle East took their toll. For both measurement intervals (2008and 2011 year ends, respectively), the compounded return of the money invested in the DAX at thebeginning of the periods considered in the analysis factors in a dividend income component as the DAXTR Index delivers a superior return compared to the DAX PR. The return component attributable to acontinuously compounding return12 of 1,000 euros invested in the dividend-paying index DAX TR at thebeginning of the measurement period amounts to 149.54 euros for the Dec. 30, 2011-Sep. 30, 2014period and 367.09 euros for the Dec. 31, 2008-Sep. 30, 2014 period.

In the dynamic version of the Gordon growth model, the stock price is dependent not only on the pace ofgrowth of dividends (as well as on the discount rate – the lower the discount rate, the higher the dividend)but also on the length of the period in which the dividend growth rate is expected to stay at sustainedlevels (or how long the discount rate is expected to remain low).

12This is a simplification of the real world where asset prices are nonlinear combinations of expected future dividends and returns, as both are

time varying. Expanding on a dynamic Gordon growth model, Campbell (Campbell, J., 1991, “A Variance Decomposition for Stock Returns”,Economic Journal, 101, 157-179) shows that asset returns are linear combinations of revisions in expected future dividends and returns. Inparticular, changes in expectations of future dividends or returns determine opposite effects on asset returns. Ceteris paribus, an increase inexpected future dividends determines a capital gain today, while a capital loss today is triggered by an increase in expected future returns. Asclarified in Campbell, Lo, and MacKinlay (Campbell J., and A. W. Lo, and A.C. MacKinlay, 1997, “The Econometrics of Financial Markets”,Princeton University Press, Princeton) in case the flow of dividends is given, future price appreciation from a lower current price will be the onlydeterminant of higher future returns.

900

1000

1100

1200

1300

1400

1500

1600

1700

1800

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14

DAX 30 TR DAX 30 PR EURO STOXX 50 TR S&P 500 TR

1709.86

1606.26

1571.23

1456.72

1,709.8

1,606.21,571.21,456.7

STOXX LTD.


44

In a recent analysis of the Bundesbank13 , it is clarified how a pure index price appreciation only explainshalf of the stellar performance of the DAX for the period 1998 through the end of August 2014. Theindex has resembled the pattern of annual expected corporate profits, in addition to factoring in discountrates and changes in expectations of corporate profitability, as reflected in the PE ratio.

13Deutsche Bundesbank, „Eigentümerstruktur am deutschen Aktienmarkt: allgemeine Tendenzen und Veränderungen in der Finanzkrise“,

September 2014

STOXX LTD.

45

Appendix A

Tables A1.1 to A30.2 provide estimates of selected valuation metrics and fundamental ratios for the DAXconstituents for the 12 months ending on Dec. 31, 2014 and Dec. 31, 2015. The source for the data isBloomberg.

FIGURE A1.1 ADIDAS, DEC. 31, 2014 (EST.) FIGURE A1.2 ADIDAS, DEC. 31, 2015 (EST.)

FIGURE A2.1 ALLIANZ, DEC. 31, 2014 (EST.) FIGURE A2.2 ALLIANZ, DEC. 31, 2015 (EST.)

0.7 48.6

9.04.5

-22.7 -30.0-20.0-10.0

0.010.020.030.040.050.0

RevenueGrowth %, YoY

Gross ProfitMargin %

EBITDA Margin%

Net IncomeBefore XOMargin %

Adjusted EPSGrowth %, YoY 5.4

49.1

9.45.0

16.80.0

10.0

20.0

30.0

40.0

50.0



EBITDA Margin%


Adjusted EPSGrowth %, YoY

-1.3

0.4

11.2

6.6

4.0-2.00.02.04.06.08.0

10.012.0


Net PremiumsEarned Growth

% YoY

OperatingIncome Margin

%



20.3

n.a.

9.05.4

5.3 0.0

5.0

10.0

15.0

20.0

25.0

Revenue Growth%, YoY


% YoY


%



STOXX LTD.

46

FIGURE A3.1 BASF, DEC. 31, 2014 (EST.) FIGURE A3.2 BASF, DEC. 31, 2015 (EST.)

FIGURE A4.1 BAYER, DEC. 31, 2014 (EST.) FIGURE A4.2 BAYER, DEC. 31, 2015 (EST.)

-4.825.9

15.07.5

7.6-5.00.05.0

10.015.020.025.030.0



EBITDAMargin %


Adjusted EPSGrowth %, YoY -4.5

27.1

16.78.5

10.2-5.00.05.0

10.015.020.025.030.0



EBITDAMargin %



3.552.3

21.411.9

6.5 0.010.020.030.040.050.060.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY8.4

52.8

22.312.8

16.4 0.010.020.030.040.050.060.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

STOXX LTD.

47

FIGURE A5.1 BAYERISCHE MOTOREN WERKE, DEC. 31,2014 (EST.)

FIGURE A5.2 BAYERISCHE MOTOREN WERKE, DEC. 31,2015 (EST.)

FIGURE A6.1 BEIERSDORF, DEC. 31, 2014 (EST.) FIGURE A6.2 BEIERSDORF, DEC. 31, 2015 (EST.)

4.724.8

15.7

7.4

10.40.0

5.0

10.0

15.0

20.0

25.0



EBITDAMargin %



5.3 24.3

15.6

7.3

5.1 0.0

5.0

10.0

15.0

20.0

25.0



EBITDAMargin %



4.724.8

15.7

7.4

10.40.0

5.0

10.0

15.0

20.0

25.0



EBITDAMargin %



5.324.3

15.6

7.3

5.1 0.0

5.0

10.0

15.0

20.0

25.0



EBITDA Margin%



STOXX LTD.

48

FIGURE A7.1 COMMERZBANK, DEC. 31, 2014 (EST.) FIGURE A7.2 COMMERZBANK, DEC. 31, 2015 (EST.)

FIGURE A8.1 CONTINENTAL, DEC. 31, 2014 (EST.) FIGURE A8.2 CONTINENTAL, DEC. 31, 2015 (EST.)

-12.3 n.a.

15.9

6.8

19.4

-15.0-10.0

-5.00.05.0

10.015.020.0

Net RevenueGrowth %, YoY

Profit beforeProvisionsMargin %


%



n.a.

21.611.8

86.4

0.0

20.0

40.0

60.0

80.0

100.0

Net RevenueGrowth %,

YoY



%


Adjusted EPSGrowth %,

YoY

4.224.9

15.9

7.4

13.90.0

5.0

10.0

15.0

20.0

25.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

9.0 25.0

16.1

7.6

11.1

0.05.0

10.015.020.025.030.0

RevenueGrowth %,

YoY


EBITDAMargin %



YoY

STOXX LTD.

49

FIGURE A9.1 DAIMLER, DEC. 31, 2014 (EST.) FIGURE A9.2 DAIMLER, DEC. 31, 2015 (EST.)

FIGURE A10.1 DEUTSCHE BANK, DEC. 31, 2014 (EST.) FIGURE A10.2 DEUTSCHE BANK, DEC. 31, 2015 (EST.)

7.7 23.5

12.15.2

45.0

0.0

10.0

20.0

30.0

40.0

50.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

5.5 23.5

12.45.5

14.8

0.0

5.0

10.0

15.0

20.0

25.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

-9.9n.a.

13.29.5

-29.9 -30.0-25.0-20.0-15.0-10.0

-5.00.05.0

10.015.0

Net RevenueGrowth %, YoY



%



n.a.

20.714.3

40.2

0.0

10.0

20.0

30.0

40.0

50.0

Net RevenueGrowth %,

YoY


OperatingIncome

Margin %



YoY

STOXX LTD.

50

FIGURE A11.1 DEUTSCHE BÖRSE, DEC. 31, 2014 (EST.) FIGURE A11.2 DEUTSCHE BÖRSE, DEC. 31, 2015 (EST.)

FIGURE A12.1 DEUTSCHE LUFTHANSA, DEC. 31, 2014(EST.)

FIGURE A12.2 DEUTSCHE LUFTHANSA, DEC. 31, 2015(EST.)

-0.977.7

50.1

31.1

5.2-10.00.0

10.020.030.040.050.060.070.080.0



EBITDA Margin%



78.4

50.632.1

10.3 0.0

20.0

40.0

60.0

80.0



EBITDA Margin%



0.3

n.a.

8.62.2

8.30.0

2.0

4.0

6.0

8.0

10.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY3.0

n.a.

10.73.5

59.8 0.010.020.030.040.050.060.0



EBITDA Margin%



STOXX LTD.

51

FIGURE A13.1 DEUTSCHE POST, DEC. 31, 2014 (EST.) FIGURE A13.2 DEUTSCHE POST, DEC. 31, 2015 (EST.)

FIGURE A14.1 DEUTSCHE TELEKOM, DEC. 31, 2014(EST.)

FIGURE A14.2 DEUTSCHE TELEKOM, DEC. 31, 2015(EST.)

2.1 5.2

7.8

3.7

1.00.0

2.0

4.0

6.0

8.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

4.1

5.6

8.1

3.9

7.1 0.0

2.0

4.0

6.0

8.0

10.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

1.839.7

28.6

4.5

-1.4 -5.00.05.0

10.015.020.025.030.035.040.0



EBITDA Margin%



40.1

28.8

4.89.60.0

10.0

20.0

30.0

40.0

50.0

RevenueGrowth %,

YoY


EBITDAMargin %



YoY

STOXX LTD.

52

FIGURE A15.1 E.ON, DEC. 31, 2014 (EST.) FIGURE A15.2 E.ON, DEC. 31, 2015 (EST.)

FIGURE A16.1 FRESENIUS MEDICAL, DEC. 31, 2014(EST.)

FIGURE A16.2 FRESENIUS MEDICAL, DEC. 31, 2015 (EST.)

-4.5 11.7

7.2

1.5

-21.8 -25.0-20.0-15.0-10.0

-5.00.05.0

10.015.0



EBITDA Margin%



11.6

7.2

1.6

4.0 0.02.04.06.08.0

10.012.0

RevenueGrowth %,

YoY


EBITDAMargin %



YoY

8.6 31.9

19.0

6.9

0.03 0.0

10.0

20.0

30.0

40.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY6.5

32.2

19.4

7.3

12.0 0.05.0

10.015.020.025.030.035.0



EBITDA Margin%



STOXX LTD.

53

FIGURE A17.1 FRESENIUS SE, DEC. 31, 2014 (EST.) FIGURE A17.2 FRESENIUS SE, DEC. 31, 2015 (EST.)

FIGURE A18.1 HEIDELBERG CEMENT, DEC. 31, 2014(EST.)

FIGURE A18.2 HEIDELBERG CEMENT, DEC. 31, 2015(EST.)

12.2 30.1

17.8

4.8

4.7 0.0

10.0

20.0

30.0

40.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY7.2

30.8

18.4

5.2

15.2 0.05.0

10.015.020.025.030.035.0

RevenueGrowth %,

YoY


EBITDAMargin %



YoY

-2.159.2

17.85.3

12.5 -10.00.0

10.020.030.040.050.060.0



EBITDA Margin%



6.8

59.0

18.46.3

25.8 0.010.020.030.040.050.060.0



EBITDA Margin%

Net IncomeBefore XO Margin

%


STOXX LTD.

54

FIGURE A19.1 HENKEL, DEC. 31, 2014 (EST.) FIGURE A19.2 HENKEL, DEC. 31, 2015 (EST.)

FIGURE A20.1 INFINEON, DEC. 31, 2014 (EST.) FIGURE A20.2 INFINEON, DEC. 31, 2015 (EST.)

0.1

48.1

17.811.3

5.5 0.0

10.0

20.0

30.0

40.0

50.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY6.1

48.6

18.311.7

9.0 0.0

10.0

20.0

30.0

40.0

50.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

11.9

38.2

25.511.5

75.1 0.0

20.0

40.0

60.0

80.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY9.8

39.2

26.4

12.7

20.3 0.0

10.0

20.0

30.0

40.0

RevenueGrowth %,

YoY


EBITDAMargin %



YoY

STOXX LTD.

55

FIGURE A21.1 K+S, DEC. 31, 2014 (EST.) FIGURE A21.2 K+S, DEC. 31, 2015 (EST.)

FIGURE A22.1 LANXESS, DEC. 31, 2014 (EST.) FIGURE A22.2 LANXESS, DEC. 31, 2015 (EST.)

-5.6 41.3

21.68.4

-24.7 -30.0-20.0-10.0

0.010.020.030.040.050.0



EBITDA Margin%



41.7

21.48.1

-0.2 -5.00.05.0

10.015.020.025.030.035.040.045.0



EBITDA Margin%

Net IncomeBefore XO Margin

%


-1.5 21.2

9.92.2

32.1 -5.00.05.0

10.015.020.025.030.035.0



EBITDA Margin%



21.7

11.03.5

57.3 0.010.020.030.040.050.060.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

STOXX LTD.

56

FIGURE A23.1 LINDE, DEC. 31, 2014 (EST.) FIGURE A23.2 LINDE, DEC. 31, 2015 (EST.)

FIGURE A24.1 MERCK KGAA, DEC. 31, 2014 (EST.) FIGURE A24.2 MERCK KGAA, DEC. 31, 2015 (EST.)

2.335.6

23.2

8.2

8.9

0.0

10.0

20.0

30.0

40.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

6.8

36.2

23.5

8.8

14.3 0.0

10.0

20.0

30.0

40.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

5.171.4

29.6

17.9

5.8

0.010.020.030.040.050.060.070.080.0



EBITDAMargin %



71.2

29.518.1

4.60.0

20.0

40.0

60.0

80.0

RevenueGrowth %,

YoY

GrossProfit

Margin %

EBITDAMargin %

NetIncome

Before XOMargin %

AdjustedEPS Growth

%, YoY

STOXX LTD.

57

FIGURE A25.1 MÜNCHENER RÜCK, DEC. 31, 2014 (EST.) FIGURE A25.2 MÜNCHENER RÜCK, DEC. 31, 2015 (EST.)

FIGURE A26.1 RWE, DEC. 31, 2014 (EST.) FIGURE A26.2 RWE, DEC. 31, 2015 (EST.)

-18.4n.a.

8.75.9

-4.5-20.0-15.0-10.0

-5.00.05.0

10.0



% YoY


%



1.1

n.a.

8.45.5

-1.3 -2.00.02.04.06.08.0

10.0


Net PremiumsEarned Growth %

YoY

OperatingIncome Margin %



-1.7

24.7

13.2

2.7

-42.2 -50.0-40.0-30.0-20.0-10.0

0.010.020.030.0



EBITDA Margin%



24.5

13.1

2.6

0.7 0.0

5.0

10.0

15.0

20.0

25.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY

STOXX LTD.

58

FIGURE A27.1 SAP, DEC. 31, 2014 (EST.) FIGURE A27.2 SAP, DEC. 31, 2015 (EST.)

FIGURE A28.1 SIEMENS, DEC. 31, 2014 (EST.) FIGURE A28.2 SIEMENS, DEC. 31, 2015 (EST.)

3.772.2

34.623.8

2.7 0.0

20.0

40.0

60.0

80.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY 6.9

72.9

35.824.2

9.2 0.0

20.0

40.0

60.0

80.0



EBITDAMargin %



-2.3 29.3

13.47.4

36.1 -5.00.05.0

10.015.020.025.030.035.040.0



EBITDA Margin%



30.1

14.17.9

12.1 0.05.0

10.015.020.025.030.035.0



EBITDA Margin%



STOXX LTD.

59

FIGURE A29.1 THYSSENKRUPP, DEC. 31, 2014 (EST.) FIGURE A29.2 THYSSENKRUPP, DEC. 31, 2015 (EST.)

FIGURE A30.1 VOLKSWAGEN, DEC. 31, 2014 (EST.) FIGURE A30.2 VOLKSWAGEN, DEC. 31, 2015 (EST.)

5.0

15.5

5.80.7

131.50.0

50.0

100.0

150.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY4.7

16.3

6.71.6

180.0 0.0

50.0

100.0

150.0

200.0



EBITDAMargin %



2.121.7

12.3

5.2

15.60.0

5.0

10.0

15.0

20.0

25.0

RevenueGrowth %,

YoY


EBITDAMargin %


AdjustedEPS Growth

%, YoY4.5

21.9

13.05.6

12.2 0.0

5.0

10.0

15.0

20.0

25.0



EBITDAMargin %



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The report was closed with information available as of the market close on Oct. 10, 2014.STOXX Research Reports are for informational purposes only and do not constitute investment advice or an offer to sell or the solicitation of anoffer to buy any security of any entity in any jurisdiction.Although the information herein is believed to be reliable and has been obtained from sources believed to be reliable, we make norepresentation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of suchinformation.No guarantee is made that the information in this report is accurate or complete and no warranties are made with regard to the results to beobtained from its use. STOXX Ltd. will not be liable for any loss or damage resulting from information obtained from this report. Furthermore,past performance is not necessarily indicative of future results.The views and opinions expressed in this research report are those of the author and do not necessarily represent the views of STOXX Ltd.This report is for individual and internal use only. It may not be reproduced or transmitted in whole or in part by any means, electronic,mechanical, photocopying, or otherwise, without STOXX's prior written approval.

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