Hope for déjà vu.
The results of the ifo business climate survey for January were sobering. The mood in industry at the start of the year is just as poor as it was at the end of last year. The index of business expectations in the manufacturing sector, which is so important for the private wealth stock market indicator, even fell once again - from minus 23.0 to minus 26.0 points.
To be honest, we had expected more. By now, every politician must realise that a fundamental economic policy is necessary if Germany is to remain an industrial location. There was therefore certainly hope that the prospect of a turnaround would be reflected positively in business expectations for the next six months.
A similar feat has already been achieved twice in the last 50 years. Why shouldn't it be possible a third time?
At the beginning of the 1980s, Germany was in recession after two oil crises and a period of high inflation rates. On 17 September 1982, the four FDP ministers resigned from the SPD/FDP government due to differences in economic policy. On 1 October, SPD Chancellor Helmut Schmidt was removed from office by a constructive vote of no confidence in the Bundestag with the votes of the Union parties and a majority of FDP MPs, and Helmut Kohl was elected as his successor. In the March 1983 election, the CDU/CSU received a clear government mandate for its programme of economic consolidation with 48.8 percent and subsequently formed a coalition with the FDP.
At the beginning of the 2000s, Germany had suffered a massive loss of competitiveness and was regarded as the sick man of Europe. At the same time, the consequences of the bursting of the internet bubble were still being felt on the labour market. On 14 March 2003, Chancellor Gerhard Schröder promised to end the reform backlog in Germany under the slogan ‘Courage for peace - courage for change’. In times of economic stagnation, the Social Democrat wanted to make Germany competitive again with the help of Agenda 2010.
The turnaround was achieved both in 1982 under the CDU/CSU and in 2003 under the SPD/Greens. And a very lucrative time dawned for investors in German shares. In each of the following four years, the DAX tripled - starting from an admittedly very low crisis level. A bold turnaround towards a supply-oriented economic policy, less government, more market, less bureaucracy, lower taxes and duties would probably be an initial spark for the location again this time. The shares of second and third-tier companies in particular would benefit from this.
It is also interesting in this context that a draft of an EU strategy paper has just been published. It announces a vehement crackdown on bureaucracy. The EU Commission will make an unprecedented effort for more simplification. At the same time, a new competitiveness check will scrutinise new initiatives more closely. This will involve, for example, assessing the expected impact of EU projects on cost differences compared to other international competitors.
If Europe finally succeeds in breaking up rigidities and a government in Germany that is capable of acting, business-friendly and willing to reform emerges after the elections on 23 February, this would very likely be reflected in an improvement in business expectations in industry and stock market sentiment.
We are excited. The current business climate index shows that business leaders do not yet really believe in this. This is why the private wealth stock market indicator remains cautious.
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.
As the economic component is still ‘red’ and the German stock market is trading above its ‘fair value’, this range lies between 45 and 75 per cent of the individually planned equity allocation.
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. And the second and third-tier stocks are also undervalued - in some cases significantly so. We are therefore not reducing the strategic range for the German equity market as a whole, but are more cautious about the DAX at the current level.
Within this corridor, the capital market seismograph - the third component in the private wealth stock market indicator alongside the economy and valuation - defines the exact positioning. The probability landscape of the seismograph has been very positive for a long time. This has not changed recently. This is why the equity allocation in the private wealth stock market indicator remains at the upper end of the strategic corridor at 75 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 37.5 per cent in equities (75 per cent of 50 per cent results in an equity allocation of 37.5 per cent). The cash portion, 12.5 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.
PS: Enclosed you will find the two contemporary documents, each of which initiated a turning point in German economic policy. They are interesting and absolutely worth reading.
Helmut Kohl's speech of 13 October 1982 (source: Verhandlungen des Deutschen Bundestages, 9. Wahlperiode, Stenographische Berichte, Bd. 121, Bonn 1982, pp. 7213-7229) can be found here:
https://dserver.bundestag.de/btp/09/09121.pdf
Gerhard Schröder's speech of 14 March 2003 is available at the following link: