Dear Readers,

In April, the ifo business climate index plunged to its lowest level ever measured. The fact that the current mood among German companies is catastrophic is not surprising given the global shutdowns. More critically, expectations for the coming six months have also continued to fall massively. In plain language, this means that even though the current situation is already extremely bleak, companies do not see any improvement even on a six-month horizon, but expect it to deteriorate further.

This may be related to the fact that certain sectors are not yet fully affected (financial industry) and other sectors are still processing old orders. These industries are likely to see their business activities "phased out" or further reduced in six months

The ifo Business Clock shows the whole drama (chart). Please compare the positioning relative to the financial market crisis in 2008/2009, when the situation reached its lowest point in February and April 2009. Expectations marked the low point in December 2008 and then rose slightly again. They thus generated a long-term buy signal in the private-wealth stock market indicator in March 2009.

Today, the situation is similarly desperate, but expectations are much more pessimistic than they were then. And there is still no sign of a trend reversal in expectations. On the contrary.

Interesting for you: During the financial crisis, the profits of DAX companies fell by around 60 percent - from 585 to 240 profit points per DAX. In 2019 the DAX companies earned 830 points/DAX. If profits collapsed in line with the financial crisis, DAX earnings would fall to 330 points. However, the ifo business climate suggests that things will get much worse this time.

The key question now is: Are investors still prepared to look beyond the trough of the coming recession if DAX earnings actually fall by more than 60 percent? Or will there then be a further, significant drop in prices on the stock markets?

No one can give you an answer to that today. However, the current survey results of the ifo Institute warn against becoming optimistic too soon. At the current level of the stock markets, the risks are probably greater than the opportunities.

Conclusion:

The private wealth stock market indicator continues to advise a defensive stance. The specifically recommended stock weighting is between 30 and 70 percent of the capital earmarked for equity investments. The exact positioning within this range is controlled by the results of the capital market seismograph. This was extremely cautious until mid-April, when it increased the equity market allocation to "slightly underweight". This classification is still valid today. According to the private-wealth stock market indicator, around 40 percent of the capital earmarked for equity investments should continue to be invested. 60 percent will remain in the coffers as liquidity.

Your

Klaus Meitinger

Note: Despite careful selection of sources, no liability can be accepted for the accuracy of the content. The information provided in private wealth is for information purposes only and does not constitute an invitation to buy or sell securities.