German industry has digested the tariff shock. Current data from the ifo Business Climate Index for June show that the economic stabilisation process is underway and the economy is on a moderate recovery path. This also improves the outlook for the German stock market.

This is particularly impressive when illustrated by the ifo Business Cycle Clock (Chart 1). The clock visualises the classic course of an economic cycle in the interplay between the business situation and business expectations. Expectations generally precede the situation. In the crisis quadrant, expectations initially improve, but the situation remains difficult. Once the economy reaches the recovery quadrant, expectations continue to rise. But now the business situation, sales and profits are catching up.

This is encouraging, because the German economy is now clearly on its way from the crisis quadrant to the recovery quadrant. In the past, the entire movement on the business cycle clock from the bottom left to the top right has almost always been very lucrative for investors. There have been ten such phases since 1991. They lasted between nine and 24 months, with an average of 17 months. During this time, the DAX rose by an average of 35 percent. Only once – from December 2001 to August 2002 – did investors record a loss. In nine out of ten cases, it was therefore profitable to be heavily invested in such a situation.

The important economic component in the private wealth stock market indicator is also sending out positive signals. As you know, three consecutive improvements in business expectations were previously regarded by economic researchers as a clear turnaround in the German economy. In this case, the economic traffic light of the private wealth stock market indicator automatically switches to green.

Following the improvement in business expectations in February and March of this year, this turnaround already seemed to be in sight. However, Trump's tariff hammer initially dashed these hopes. In April, the ifo business expectations index slumped once again. In May and June, this decline was more than offset (Chart 2). In purely theoretical terms, the positive trend now needs to be confirmed in July. However, as five of the last six results of the ifo survey were positive, this can already be considered an established upward trend. The economic component of the private-wealth stock market indicator is therefore already switching to ‘green’.

Given the conflict in the Middle East and the unresolved customs issue with the US, this is actually surprising. Our assumption: Company leaders apparently value Germany's expansionary economic policy more highly than geopolitical uncertainties. Nevertheless, there remains a certain risk that the tariff negotiations between Europe and the US will fail in July. In this case, the positive trend could be called into question again. However, as this is not to be expected at present, the equity allocation in the private wealth stock market indicator is now increasing.

The conclusion for investors:
The business expectations of German industry and the valuation of the German stock market, derived from a ‘fair value model’ developed by the editorial team, together define the strategic corridor for the equity allocation of the private-wealth stock market indicator.
With the positive development of business expectations in industry, the economic traffic light of the private wealth stock market indicator has switched from red to green. Viewed in isolation, this leads to a significant increase in the equity allocation.
However, the ‘fair value’ calculation dampens this effect somewhat. After all, the German stock market has already anticipated some of the positive developments in recent weeks. It is now trading more than 20 percent above its ‘fair value’ overall. However, there are significant differences. The DAX is overvalued by more than 30 percent. The shares of small and medium-sized companies, on the other hand, are still fairly valued.

Important for you: Combining both factors – the economy and valuation – the private wealth stock market indicator increases the corridor for the equity allocation from the previous 50 to 80 per cent to the current 70 to 100 per cent of the individually planned equity allocation.

Within this corridor, the capital market seismograph – the third component of the private wealth stock market indicator alongside the economy and valuation – defines the exact equity allocation. During the turbulent stock market month of April, the seismograph went on the defensive for a short time, but then switched back to offensive mode at the end of April. Since then, the probability of positive, calm markets has dominated by a wide margin, the probability of negative turbulence is negligible, and the Seismograph is maintaining its offensive stance.

Given the turmoil in the Middle East, this is particularly noteworthy and underscores the Seismograph's usefulness for investors. Instead of frantically reducing the equity allocation after price declines and then increasing it again, the Seismograph remained highly invested over the past two months. In retrospect, this was the right strategy.

Currently, this means that the equity allocation in the overall private wealth stock market indicator remains at the upper end of the strategic corridor. Now that the economic signal has given the green light, it is rising from 80 to 100 percent.

For investors who consider an equity allocation of 50 percent to be optimal in their strategic asset allocation, the model would therefore suggest investing 50 percent in equities (100 percent of 50 percent results in an equity allocation of 50 percent). The private wealth stock market indicator is thus fully invested.

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 informational purposes only and does not constitute a solicitation to buy or sell securities.