• Klaus Meitinger

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050 Lerbach 1Panel of experts. The uncertainty on the capital markets is greater than ever before. Investors urgently need orientation. The Lerbach round gives answers to the ten most important questions zum Jahreswechsel - from stock allocation to customs disputes.

Francis Galton was surprised. In 1906, the Englishman had asked visitors to the West English livestock fair to take part in a competition to find out exactly what the slaughter weight of a cow was. The best estimate was not given by one of the butchers surveyed - it corresponded to the mean value.

Using group intelligence in an independent survey is a useful way to get answers to difficult questions. Private wealth can draw on the network of the Lerbach Round - 40 bankers, family officers and asset managers. The editors confronted the panel with the most important current topics. How are trade dispute, Brexit and the Italian conflict with the EU to be classified in the budget dispute? How severe is the economic downturn? How did the professionals structure their portfolio against this background? And which stock markets offer the best prospects for next year? With all these questions we rely on the wisdom of the many.

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// What is the probability that Donald Trump will raise tariffs against China to 25 percent on January 1 and that the trade dispute will escalate in 2019?

Only 43 percent of the professionals believe that politics makes sense. In contrast, 57 percent of those surveyed believe that the trade dispute will intensify next year. That is a lot, because the consequences for the world economy would be incalculable. First skid marks can already be seen in China. Die Foreign orders are declining. Setzt, exports from China could fall next year. If economic growth and imports in the Middle Kingdom were to fall, Germany as an export nation would be particularly hard hit. The conclusion of the professionals is clear: Solange there is no agreement between the USA und China, the uncertainty in the world economy and capital markets continues.

However, one of the bankers pointed out that an increase in tariffs on 1 January could increase the pressure on Beijing to such an extent that in the end a deal with China would still be possible. It stays exciting.

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// 02. How likely is a "hard" Brexit?

The Lerbach Round is also divided on this point - 50 to 50. Now that the EU and Theresa May have reached agreement, it is "only" a matter of approval in the British Parliament. The possible date for the vote is 10 December. Wenn you hold this issue in your hands, so maybe you already know more. There's no way it's going to be easy. May must get 320 congressmen behind her. So far, however, only 235 votes are considered certain, 85 more have yet to be convinced. If Parliament does not agree to a plan by its own deadline of 21 January 2019, a "hard" Brexit is inevitable. Then Britain would leave the EU without an agreement, be granted third country status and lose access to the European internal market. The risk of recession there rose significantly.

But even with a treaty, the UK's langfristigen Aussichten are bad - less trade, less investment and less immigration of skilled labour will mean lower long-term growth, higher inflation and a weaker currency. One of the respondents therefore put on record as a surprise:  Ein Euro will be worth as much as a British pound in 2019.

// 03. Is Italy triggering a new euro crisis?

70 percent of the respondents do not believe that the euro crisis of 2012 will be repeated. According to their assessment, European politicians will continue to defend the euro with teeth and claws. This does not mean, however, that the markets will soon be moving on to the next day's agenda. Die Growth forecasts underlying the Italian budget are far too optimistic. This is why im Verlauf of 2019 will become increasingly clear that the deficit target - which is already too high - can never be met. Then a construction error of the sanction mechanism becomes clear: It is difficult to punish a country in need financially.

// What is the probability of a recession - two negative quarters in a row - in the next two years in the USA?

Because the US economy is critical to the direction of the world economy (and stock markets), this is one of the crucial questions. For the year 2019, the Lerbach round is still quite relaxed. It estimates the probability of recession at only 26 percent. The base scenario with 74 percent probability envisages a continuation of the upswing at a slower pace. The positive effects of the tax reform are diminishing and the rise in interest rates is dampening somewhat. But the important consumption continues in view of the low unemployment. In 2019, the US economy is likely to celebrate the longest upswing in its history with 120 months.

Then, however, the situation will probably become more difficult. For in 2020, according to the Lerbach Round Table, the risk of recession in the USA will rise to 49 percent. This is a warning signal for investors. Who wants to buy 2019 shares when a recession threatens in 2020? After all, 51 percent continue to focus on expansion. Her most important argument: Donald Trump wants to be re-elected at the end of 2020. For this reason, it should step on the gas again in terms of fiscal policy in advance. Massive infrastructure improvements are still on the agenda. On credit, of course. This would give the US economy another boost. But the thick end comes in 2021 or 2022.

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// 05. What is the probability of falling corporate earnings in 2019?

Over the past two years, the stock markets have benefited from sharply rising corporate earnings. In 2019, analysts in Europe - based on the Stoxx 600 - expect a plus of 9.3 percent again. In the USA, the figure is even expected to rise to 9.6 percent based on the S&P 500. That seems very optimistic. The Lerbach Round even expects company profits for the S&P 500 to fall with a probability of 32 percent. In Europe, experts even estimate the risk of declining earnings at 38 percent. If the Lerbach Round is right, the stock markets are threatened by a permanent headwind from this side.

// The conclusion: Were the turbulences in October and November the beginning of the end of the stock market boom?

The initial situation is explosive. Markets are moving in big waves around a long-term trend. If share prices and corporate earnings have moved a long way from this, there is a high probability that they will eventually return to these averages. Since 2009, equity investors have benefited from a unique constellation that can be described by two acronyms. TINA - There Is No Alternative, there is no alternative to equities in the low interest rate environment. And NICE - Non Inflationary Continuous Expansion. Correspondingly, corporate profits and share prices rose significantly. Now the expansion seems to have stuttered. Und At least in the USA, investors with a yield of three to seven percent - depending on the creditworthiness of the debtor - have alternatives to equities again. Is the boom over?

The survey of participants in the Lerbach round shows a two-part picture. 55 percent of the experts say no and point out that although the economic momentum has passed its peak, growth rates are likely to remain positive for the time being. This offers room for price increases (see also page 56).

However, 45 percent of the experts are skeptical. Sie say: "Yes, the sustained broad upward trend on the stock markets is over." It is important to note that this group does not necessarily assume that the bear market will last for a long time. A sideways trend with strong fluctuations is more likely in the coming year. In this environment, money can still be earned through stock selection and clever timing. Just in case the deal goes bad, it'll look bleak.

// 07. How has the share ratio of professionals changed?

Zum Jahresanfang In 2018, the equity quota in the portfolio of an investor with an average risk propensity in the mandates of Lerbach professionals was 59 percent. Aktuell, the figure is still 43 percent. The Lerbach Round thus significantly reduced risk over the course of the year, but has not yet completely turned its back on equities as an asset class. In comparison with all other asset classes - bonds, real estate - equities are by far the cheapest asset, especially after the recent price setbacks. If the Gordian trading hub were to break through, there would be massive potential for recovery. The experts invested the released funds primarily in cash - with the aim of reinvesting in equities in the event of further price setbacks or an improvement in the political situation. Vereinzelt, the ratio of French and German government bonds was also increased. Deren Kurse would rise if the trade war intensifies. They therefore offer a diversification in the portfolio that cash cannot provide.

// 08. Search for favorites - which stock markets are the most attractive after the turbulence of recent months?

The favourites of the round are very close together. Only the emerging markets of Latin America are clearly outperformed. After the prices in Brazil in particular have risen significantly in the run-up to and shortly after the elections, the professionals there are apparently taking profits in the short term. The question is also open whether the new President Jair Bolsonaro can actually keep what he promised.

The market with the best ratings is surprisingly Japan. Shares there are historically cheap. It is also positive that the Bank of Japan will be the world's most expansive central bank in 2019. It cements the interest rate level at zero and continues to buy both bonds and equities.

China ranks second. The share of modern industries - Internet platforms, health, online education - in Chinese stock indices has increased dramatically. Areas subject to US tariffs now account for less than ten percent. According to the professionals, some investors might not have done this on dem Schirm. Maybe that's why they overreacted last. After the massive share price losses, there is a comeback opportunity. Auf Rang three the rest of Asia's emerging markets land due to the structurally positive growth story. Very closely together the USA,  Europa as well as Germany follow thereafter.

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// The gold price did not benefit from the turbulence. Has gold become obsolete as a hedging instrument?

65 percent of respondents say no, gold remains the ultimate security anchor in the portfolio. However, investors are unlikely to expect too much either. Gold develops its protective function only in the case of major systemic risks. And not during price turbulence on the capital markets. ®


Surprise, surprise.

The Lerbach Round Table names surprises for 2019 - ten developments that are unlikely but not impossible.

// 01. Political chaos in Germany.

The Grand Coalition breaks up. After the new elections in Germany, "Jamaica" gets a second chance.

// 02. Everything's gonna be all right.

Following an agreement in the trade war, the USA and China renounce customs duties and non-tariff trade barriers. Italy gives in to the budget dispute with the EU. The mood among entrepreneurs is improving abruptly, investments that have been postponed so far are being made up for. It comes to a growth spurt. Stock prices are rising sharply. The bull market does not peak until 2020.

// 03. Return of inflation in the USA.

Import prices in the USA are rising thanks to higher tariffs. Since unemployment is low, wage pressure is now coming up. Die Inflation rate climbs above three percent. The FED is raising its key interest rates faster and more strongly than expected. The stock market collapses.

// 04. Ciao, ciao, Italia.

Italy launches a referendum to withdraw from the EU. Greece joins them. Thereafter, the euro gains the status of a hard currency on the capital markets. The ECB raises interest rates several times until the end of the year.

// 05. Welcome back, United Kingdom.

After the No Deal Brexit, chaos reigns in the UK. EU supporters are rapidly gaining support. Shortly before Christmas 2019, after a new referendum, the British vote to open accession talks with the EU.

// 06. Surprise im DAX.

Deutsche Bank follows Commerzbank's further markdowns into the MDAX. Car stocks are celebrating a brilliant comeback thanks to their new range of electric cars.

// 07. Restart in Iran.

The regime's collapsing. The US lifts the sanctions. The oil price falls significantly due to the oversupply.

// 09. Gold shines, but silver shines stronger.

Because Donald Trump attacks the independence of the FED, the price of precious metals rises. Since the relation between gold and silver is now at a historical high, silver becomes the main beneficiary. His course is doubling.

// 10. Yields on government bonds fall significantly.

The global economy continues to weaken. The oil price collapses, inflation rates fall. The FED is raising interest rates only twice (in December 2018 and spring 2019). Yields on US government bonds are falling sharply. The performance of government bonds in 2019 is much better than expected.


The private-wealth stock market indicator - valuable signals.

At the end of February 2018, subscribers could read a very surprising message on the private wealth homepage: "We are out then - the stock market indicator of private wealth has given a sell signal". Those who oriented themselves to it were saved from high losses.

Since the first issue, the editorial staff has used the indicator they developed themselves to give readers orientation. And achieved some spectacular results. So was advised im Sommer 2007 - before the financial crisis - zum Verkauf. Im March 2009 then, when the world seemed to end, the indicator advised to buy again.

What is behind this model? In principle, the aim is to find out when the relationship between opportunity and risk is positive when investing in equities. Und when not. zwei Indikatoren is used for this purpose. First, buying stocks is interesting when the overall market is cheap. And they are risky when the market is highly valued. Secondly, equities are promising if it is to be expected that the economy and thus corporate profits will improve. And they are dangerous when the economy and earnings deteriorate.

The first question - is the market cheap or expensive? - is answered using a long-term trend model that incorporates a broad cross-section of economic data: national product, prices, exports, but also company-specific factors such as dividends or tax rates.

The investor André Kostolany outlined the basic line of thought. Er compared the interaction of economy and stock exchange with the walk of a dog and its owner. While the man - the economy - moves slowly and steadily forward, the dog - the stock exchange - sometimes runs ahead. Oder stays behind. But at some point he comes back to his master. The private-wealth trend model reflects a kind of "fair value" of the DAX in the light of long-term economic development. A comparison with the current quotes shows how far ahead the dog has run or lagged behind.

An overvaluation alone is not an indication of falling prices in the future. It only reduces the price potential. The dog can run even further ahead, wait for his master or run slower than his owner for a while. However, the further the market moves away from the real economic trend, the greater the risk.

In the past, a reversal of the trend on the stock markets was very often triggered by a turnaround in the economy. Therefore, the answer to the second question is - how is the economy developing? - so important. This provides the business climate of the Munich ifo Institute. Every month, researchers ask 7000 entrepreneurs about their business expectations for the next six months. If expectations fell three times in a row after a previous rise, the likelihood of a downturn increased. If they climbed three times in a row, this was an upswing signal. After all, those at the helm know best where the wind blows from.

The strategy is therefore to buy shares when the DAX is below its fair value AND ifo business expectations indicate a positive economic trend. And sell stocks when the DAX is well above its fair value AND ifo business expectations signal a downturn.

However, both indicators do not always give the same signals. If equities are cheaply valued and economic researchers become sceptical, it makes sense to tend to reduce the equity quota. On the other hand, an upturn in the economy with an expensive stock market would be a signal to accept a little more risk without immediately stepping on the gas.

So it is not a question of predicting trend reversals on the stock market exactly. Rather, to give indications as to how high the probability is for a successful equity investment in a certain environment. With the aim of participating in the large, long-term upward movements on the stock markets and avoiding the major downturns. This has worked pretty well in the past. Since 2003, the indicator has given only 14 signals. And led investors so very successfully through turbulent 15 years.

The current stock market model is "out of the market". According to our calculations, the "fair value" of the DAX is 11200 points. After the losses of recent months, the German benchmark index is now back in fair value. However, this does not apply to the values of the second and third rows. There are still significant overvaluations there.

The business expectations of the ifo Institute continue to point clearly downwards. The sell signal from the end of February 2018 is therefore still valid. A buy-signal is only issued when the ifo business expectations rise three times in a row. A regular update can be found on our homepage www.private-wealth.de.


Author: Klaus Meitinger

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