The ifo business climate survey for August leaves no doubt: German industry is sliding further into crisis. The economic component of the private wealth stock market indicator thus switches from amber to red.

Background: If business expectations in industry deteriorate three times in a row after a sustained upturn, this has often signalled a downward economic trend reversal in the past. In such a phase, it often becomes difficult on the stock market. This is why the private wealth stock market indicator then reduces the equity allocation.

From September 2023 to May 2024, business expectations in the manufacturing sector initially improved gradually from minus 29 to minus 6.4. There were hopes of an imminent upturn in industry. This has now been dashed.

After an initial decline in June to minus 12.5 points, business expectations fell further in July to minus 14.5 points and reached minus 17.8 points in August. The condition for a negative trend reversal in the economy - three declines in a row - has therefore been met. A deterioration in the earnings situation of companies in the manufacturing sector must therefore be expected in the coming quarters.

The conclusion for investors:

Economic development in Germany and the market valuation of the DAX define the strategic corridor for the equity allocation of the private wealth stock market indicator. As the economic component is now ‘red’ and the German stock market is trading at around the level of its ‘fair’ value, this corridor is reduced to a range of between 45 and 75 per cent of the individually planned equity allocation.

Because we had anticipated this development, it seemed sensible to us a month ago to reduce the overweighting in equities that had been in place since October 2023 and initially reduce the equity allocation from 110 to 90 per cent. The next sales step is now indicated.

The capital market seismograph - the third component in the private wealth stock market indicator alongside the economy and valuation - defines how large this should be. It determines the exact positioning within the strategic bandwidth defined by the first two factors.
The probability landscape of the seismograph has been very positive for some time now. This has not changed recently (you can find an explanation of this in our post of 8 August). This is why the equity allocation in the private wealth stock market indicator remains at the upper end of the strategic corridor. It will now be reduced from 90 per cent to 75 per cent.

An example: Anyone who considers an equity allocation of 50 per cent to be optimal based on their individual preferences in the strategic allocation of their assets could now consider investing only 37.5 per cent in equities (75 per cent of 50 per cent results in an equity allocation of 37.5 per cent). The proportion of cash in the portfolio would increase accordingly by reducing the equity position.

Yours sincerely,
Klaus Meitinger

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