Despite the G20 Summit, equities are now facing stronger headwinds

Despite the results of the recent G20 Summit, the pace of macroeconomic growth is definitely slowing. For some time, the problems were limited to emerging markets, but it is now becoming apparent that economic growth has also peaked in a number of developed countries. The trade dispute between the USA and China, patches of weakness in Brazil, Argentina and Turkey, to say nothing of the uncertainty surrounding Brexit and the budget standoff between Italy and the EU: these factors have led to numerous profit warnings at cyclical Dax companies over the course of the second half of the year. This burdensome situation has been compounded by the structural challenges facing the German automobile industry as well as by the problems afflicting individual corporations, for example Deutsche Bank or Thyssen Krupp. It is true that domestic business in Germany is ticking over nicely on account of the high propensity to consume at private households and of government expenditure. However, the strains on the foreign-trade side are showing – not surprisingly, given the DAX’s high export ratio of more than 70%. Now that the reporting season for third-quarter results has ended, it emerges that DAX earnings have shrunk by 6% in the present year to date. What is more, a glance at the leading-indicator readings makes it look probable that the business trend in the final quarter of 2018 is not going to prove any better, so the DAX will probably – quite rightly – close the year distinctly lower (for the first time since 2011).

Can things improve again in 2019? Equity-market sentiment is excessively negative at the moment. We assume that individual DAX companies are not going to have to struggle as hard as they have had to do this year. A short-term underlying recovery would seem a realistic prospect. On the other hand, there are probably no ad hoc solutions for most of the political problems mentioned; the upshot is that DAX groups are going to have to navigate a challenging environment in 2019 as well. Aggravating this situation is the fact that interest rates in the USA have been moving up, which could force heavily-indebted enterprises into a difficult pass. One case in point here in 2018 has been General Electric, where previously concealed problems have come to light in the wake of a rating downgrade. True, the equity boom is not yet about to fizzle out because aggregate economic output will probably expand in the major economies. But earnings at DAX companies are presumably set to stagnate or, at most, move up marginally next year. We are now looking for the German benchmark stock index to climb to 12,000 points by year-end 2019 (previous estimate: 13,300). Valuations remain low on our scenario because there are no hopes of a rise in corporate earnings.

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