U.S Stocks Lag Behind German Rival Deutsche Börse

Deutsche Börse shares have generated almost 14% total return this year

The stock of Deutsche Börse has outperformed local and national rivals this year, earning a total return, including dividends, of about 14%. Its increase places it among the best-performing major equities in continental Europe. Comparatively, Intercontinental Exchange Inc., the owner of the New York Stock Exchange, saw decreases of more than 29% and more than 12%, respectively.

The discrepancy demonstrates how, despite a sharp decline in initial public offerings and other share sales, choppy markets have produced pockets of opportunity for market-infrastructure companies.

How big is the Deutsche Börse

One of the biggest markets for interest-rate derivatives, including interest-rate swaps and securities like futures and options linked to European government bonds, is the Eurex exchange run by Deutsche Börse.

Years of low interest rates and minimal volatility slowed trading activity by making bets on interest-rate changes less attractive. However, as central-bank policy rates and benchmark bond yields soar along with high inflation, more traders are using Eurex to bet on the future of rates as businesses and banks try to manage their risks.

“People are looking for safety at the moment,” said Tom Lemaigre, a London-based portfolio manager at Janus Henderson Group. “Deutsche Börse offers investors that, because people think interest rates are going to keep going up, and if that happens, Deutsche Börse stands to benefit,” said Mr. Lemaigre, whose firm owns the stock.

83.7 million interest-rate derivative contracts were traded on Eurex in September, an increase of 30% from the same month last year. According to data from Deutsche Börse, the growth in trading of interest-rate futures has surpassed that of contracts linked to stocks and indices for six consecutive months.

In the third quarter, Deutsche Börse earned 95.4 million euros, or approximately $95 million, from trading and clearing interest-rate derivatives, a 41% increase over the same period the previous year. According to Deutsche Börse, high inflation, rapid tightening of monetary policy, and Russia’s invasion of Ukraine all contributed to high demand for hedging products, particularly in financial derivatives and commodities trading.

Exchange comparison is not an easy task. Different divisions within Deutsche Börse and its American competitors’ operations concentrate on things like securities trading and clearing, market data, and analytics.

While ICE is active in this market, Nasdaq does not have an interest-rate exchange platform that would profit from fluctuating rates. However, increased rates hurt ICE’s technology division, which provides support for the US mortgage market. The first half of that unit’s revenue decreased 13% year over year to $604 million as more expensive credit made homes less accessible.

According to statistics from S&P Global Market Intelligence, Nasdaq’s stock price has decreased to less than 22 times projected earnings from roughly 28 times at the beginning of the year. A comparable decline has occurred in ICE’s valuation multiple. The number of deals on the Deutsche Börse has decreased from roughly 22 to about 19.

When determining how much they should pay today for potential future cash flows, many investors use the so-called risk-free rate provided by government bonds as a guide. This implies that investors are less inclined to purchase shares at high earnings multiples as bond yields have increased this year.

According to Kyle Voigt, an analyst at Keefe, Bruyette & Woods, the rise in benchmark 10-year Treasury yields above 4% has “induced multiple compression for exchanges and other stable cash-flow firms that were previously appearing more appealing.”

ICE did not reply to demands for comment, while Nasdaq declined to do so. On Nov. 3, ICE is expected to release its third-quarter financial report.

To be sure, investors using dollars will find the performance of the Deutsche Börse less spectacular. The stock of Deutsche Börse is valued in euros and is listed in Frankfurt. Due to the euro’s decline in value versus the dollar in 2022, the stock is essentially unchanged in dollars. However, it still outperforms its American counterparts.

In addition to derivatives, Deutsche Börse’s Clearstream division provides a significant source of income from interest rates. It maintains substantial cash holdings because it settles bond trades for market participants.

It has customer balances equivalent to $17.5 billion in euros that will be utilized to acquire bonds. In order to generate interest income that rises with rates, Clearstream places this money in short-term money-market securities in the United States and Europe.

According to Benjamin Goy, an analyst at Deutsche Bank Research, Clearstream will produce net interest income of close to €500 million in 2024, which is about ten times more than it did in 2021.

The Depository Trust Co., which is owned by the Depository Trust and Clearing Corp., a company that is not entirely owned by any exchange, is the counterpart to Clearstream in the United States.