The ifo business climate for February showed the improvement that we had expected last month. Four weeks ago, we pointed out that Germany had already achieved an economic turnaround twice - in 1982/83 under a CDU/CSU-led government and in 2003 under the leadership of the SPD. Why, we asked then, should it not succeed again?

In the meantime, some economic leaders have apparently come to the same conclusion. The index of business expectations in industry, which is so important for the private wealth stock market indicator, improved significantly from minus 24.9 points to minus 18.7 points. This is an important first step. Three improvements in a row are considered a turnaround in the German industrial economy. This would also turn the economic component of the stock market indicator from ‘red’ to ‘green’. There is now a clear chance of this happening.

Particularly important: the business leaders surveyed by the info-Institut were of course not yet aware of the election results at the time of the survey. It is now clear that a CDU/CSU/SPD coalition is the most likely option for the new government. Together, they can be trusted to achieve what both parties once managed to do under their sole leadership. We therefore believe it is very likely that business expectations in industry will continue to improve in the coming month.

There is one additional aspect to consider. In this political constellation, a reform of the debt brake seems very likely. If done correctly, it could trigger the urgently needed boost in investment with corresponding multiplier effects. This in turn would also have lasting positive effects on the business climate and the private wealth stock market indicator.

The problem: In purely technical terms, it would take three improvements in business expectations before an economic turnaround could be safely assumed. This would not be the case until the end of April at the earliest. However, if the prospect of a genuine turnaround becomes clearer over the next few weeks, the German stock market would quickly honour this - especially in the case of small and medium-sized stocks. It therefore seems appropriate to increase the equity allocation in this area today - as a precaution, so to speak.

The bottom line for investors:

The economy, especially the business expectations of German industry, and the market valuation of the DAX define the strategic corridor for the equity allocation of the private wealth stock market indicator.
Although the economic component of the stock market indicator is still ‘red’, we believe there is a very high probability that it will change to ‘green’ in April. This is an unusual starting position. As the German stock market as a whole is trading slightly above its ‘fair value’, the corridor for the equity allocation would then rise from the current 45 to 75 per cent towards 75 to 100 per cent of the individually planned equity allocation. If our assessment proves to be correct, significant price gains could be expected in the meantime. We therefore consider it justifiable to raise the corridor to 55 to 85 per cent now as a precautionary measure.

For some time now, however, it has been considerably more difficult to compare the fair value of the German stock market calculated by us with the DAX. The DAX is pulled upwards almost exclusively by a handful of stocks. These glorious German five are overvalued, the rest of the DAX is fair or undervalued. In addition, many second and third tier stocks are significantly undervalued in some cases. We are focussing on these segments of the equity market when expanding our equity exposure.

Within the corridor described above, the capital market seismograph - the third component in the private wealth stock market indicator alongside the economy and valuation - defines the exact equity exposure. The probability landscape of the seismograph has been very positive for a long time. This has not changed recently. This is why the equity ratio in the private wealth stock market indicator remains at the upper end of the strategic corridor and has now risen from 75 to 85 per cent.

An example: For investors who consider an equity allocation of 50 per cent to be optimal in the strategic allocation of their assets, the model would suggest investing 42.5 per cent in equities (85 per cent of 50 per cent results in an equity allocation of 42.5 per cent). The cash portion, 7.5 per cent, is available to buy more cheaply in the event of any setbacks.

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.