What is going on with German equities?

What is the outlook for German equities? Following the significant fall in prices in the final quarter of 2018, which ultimately ruined the annual performance of the leading German index DAX, there was a counter-movement at the start of 2019, with the DAX advancing strongly. What could be in store for investors during the rest of 2019? What are the prospects for the economy and the stock market?

At the end of December 2018, it was not only sentiment on the stock markets that was poor. The mood had also cooled considerably in the upper echelons of management at German companies, as was shown by, among other things, the ifo Business Climate Index, which fell to 101 points (November 2018: 102 points) in December 2018. This was the lowest level recorded in the past two years. “The companies were less satisfied with their current business situation. Their expectations also continued to dampen,” reported Clemens Fuest, President of the ifo Institute. ^[1]

Deutsche Bundesbank expects German economy to continue on its growth path

The fears of an economic downturn spreading in some quarters appear to be exaggerated. The Deutsche Bundesbank states that “Germany’s economy looks set to continue booming for the time being ^[2]

What upside potential is offered by German equities?

Stefan Kreuzkamp, Chief Investment Officer at DWS, is also moderately confident. “The economic basis for 2019 is solid overall,” opines the expert. He believes that the chances are good that investors may once more generate attractive returns with equities in 2019. “The market correction in the fall paved the way for an economically sound but risky 2019,” reasons Kreuzkamp.^[3] However, the DWS investment experts also responded to the market distortions at the end of 2018, and slightly reduced their price target for the leading German index DAX as at the end of 2019. Nevertheless, with a figure of 11,800 points, the investment experts believe that there is significant upside potential for the DAX up to the end of December 2019^[4]

The biggest risk factors for the markets

The picture is not entirely positive, however. There are also many risks at a global scale. While these are difficult to quantify, they could significantly weigh on the markets. The most frequently cited risks are a greater slowdown in Chinese economic growth, the trade dispute between the USA and China, and the possible impact of a disorderly exit of the United Kingdom from the European Union.

Overall, we therefore find ourselves in an environment in which sudden surprises are possible at any time. For investors with a long-term investment horizon, however, investments in German equities could nevertheless be rewarding. Measured by their price/earnings ratio, for example, the news agency Bloomberg calculated that German equities are among the most favorably priced at an international level.

The advantages of savings plans

During periods of major price fluctuations, it can make sense for investors to regularly invest a fixed amount – something which is possible with a fund savings plan. Somebody who buys fund units regularly – irrespective of whether the markets are performing well or badly – does not have to deal with the question of when is the right time to buy, which as a rule is impossible for any investor to consistently answer conclusively.

The principle of “The earlier, the better” also applies when it comes to regular saving. Investors who begin to save for their old age when they are young can rely on the compound interest effect. This significantly improves their chances of successfully investing over the long term. With the right fund savings plans, investors can get started with deposits of just EUR 25 per month. It is possible for investors to individually determine the frequency and the amounts of their deposits. As is the case for all capital market investments, savings plans may also result in losses for investors, especially with shorter investment horizons.