Chart of the week: Expectations Rhine’d down

Source: Bloomberg (as of July 2019).For illustrative purposes only. No assumptions regarding future performance should be made.

Germany is experiencing a strange phenomenon — a strong stock market but weak economy. In fact, the German economy is close to entering a manufacturing recession. Activity data, such as industrial production and factory orders, is likely to have contracted during the second quarter of the year.

Recent survey data indicates little improvement in economic conditions into the autumn. Polls conducted by ZEW, which covers investors, and IFO, which covers businesses, either indicated that those surveyed became pessimistic in July or had a gloomy outlook. Manufacturing PMI also betrayed a pessimistic forecast. Indeed, the Business Expectations and Business Climate components of the IFO survey, the Assessment of Current Situation ZEW poll and the Manufacturing PMI all dropped below the worst expectations of the economists polled by Bloomberg in advance of their releases.

The summer heat has not been helping. The record heatwave in Europe has caused the water level on the River Rhine to fall. This has significant economic implications, as low water levels restrict cargo transport, thereby increasing costs (and suppressing profit margins) for businesses.

Despite these problems, the German stock market, the DAX, is up about 15% since the start of the year. Markets are paying limited attention to economic data releases, and instead are focusing on the decisions and actions of global central banks. The US Federal Reserve has taken a dovish pivot toward lower rates, which is supportive for global risk assets. The European Central Bank has also suggested lower rates, hinting at rate cuts or the possible reintroduction of quantitative easing — possibly buying corporate and government bonds. Lower interest-rate policies mean lower borrowing costs, which should provide a positive economic boost. Markets are therefore pricing in better company profits into 2020.

Investor sentiment will wax and wane as new company, political and economic news appears. The key issues for investors in German and indeed global stock markets will be deciding when all the good news about rate cuts and their effects are in the price, or whether new news can support better or worse valuations into the autumn.


The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.

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Risk warning

Risk Warning

The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.