Linde’s Frankfurt Exit Is Testimony to DAX Index’s Struggles

Alexandra Muller and Jan-Patrick Barnert, Bloomberg News

Tanks of hydrogen stand near the hydrogen electrolysis plant at Energiepark Mainz, operated by Linde AG, in Mainz, Germany, on Friday, July 17, 2020. Europe is pinning its green hopes on hydrogen in a plan that sees hundreds of billions of euros in investment flowing into the clean technology and fueling a climate-friendly economic recovery. Photographer: Alex Kraus/Bloomberg , Bloomberg

(Bloomberg) -- Germany’s DAX is set to lose its biggest member, with industrial gases specialist Linde Plc exiting the Frankfurt bourse highlighting how the benchmark index is struggling to assert itself as a global marketplace.

Linde will end its listing on the German benchmark stock exchange and focus instead on the US market, saying that maintaining two simultaneous listings is too complex.

The move, which is subject to shareholder approval, would deprive the DAX of its biggest company, a victim in no small part of its outsize weighting on the benchmark index that stipulates no member’s proportion can exceed 10%.

Linde has already peeled back its German heritage over the years, selling major assets like its forklift business or the refrigeration unit on which Linde was founded. After the company merged with US rival Praxair Inc. in 2018, Linde moved its headquarters from Munich to Guildford, UK.

The critical issue for the company has been a rule capping members’ weight in the DAX Index at 10%, resulting in automatic sales of shares when large-cap stocks exceed the threshold as their market value increases. That forces index funds to sell to restore balance.

Price Effect

Linde’s Chief Executive Officer Sanjiv Lamba said the index limit has adversely impacted Linde’s share price performance, since the stock frequently underperformed when its weight was above the cap.

An additional issue for large-cap stocks like Linde is that DAX shares can also come under pressure from investors treating them as a proxy for the wider economy. That can lead to distortions in the price.

“Given that Linde is the largest member of the DAX at 11%, despite only having about 5% of total company sales in Germany, it’s subject to selling pressure any time someone uses the DAX as a way to express a negative view or hedge on the German economy,” says Morgan Stanley analyst Vincent Andrews.

Linde fell as much as 7.9%, the most since 2018, on the back of selling by those investors and exchange-traded funds that can only hold European shares. The stock closed 3.5% lower and was the second-biggest decliner by weighting in the Stoxx 600 Index.

Luxury sports carmaker Porsche AG or engineering company Rheinmetall AG are the most likely candidates to replace Linde in the DAX, according to JPMorgan Chase & Co. analyst Pankaj Gupta. For the Euro Stoxx 50, Wolters Kluwer NV or RWE AG are the most likely replacements, he said.

DAX Reforms

While Deutsche Boerse AG has changed some rules in the past two years, expanding the number of DAX Index members to 40 from 30 in 2021 and saying it would review the index more frequently, an attempt to change the stock threshold regulation failed after a market-wide consultation showed investors prefer to leave it in place.

A spokesman for Deutsche Boerse said it had taken note of Linde’s statement but declined to comment.

The reforms Deutsche Boerse did introduce were an effort to broaden the index footprint and enable a more balanced reflection of the Germany economy. But they haven’t gone far enough to persuade the board of Linde to stay.

(Updates with candidates to replace Linde in 10th paragraph)