Germany: is the economy about to face a hot summer?

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The IFO business climate index calculated by the Munich-based IFO Institute is regarded as the most important German economic indicator. At 115.1, the value released for June last week was the highest since the launch in January 1991. It was also clearly above the value that had been expected by the financial analysts on average. The signs for substantial economic growth in Germany seem favourable.

From my point of view, this leads me to two questions: “What does that mean for the markets?” and “What is the outlook for the economy?” In order to answer these two questions, I would like to use a very simple illustration of the two components of the IFO index, i.e. the current assessment of the business environment and the expectations for the coming six months. The illustration is also known as IFO business-cycle clock. It simply derives the current position in the economic cycle from the relative position of the two components.

  • If both the current business climate and outlook are clearly positive, the German economy is in a boom phase.
  • If the current assessment and the outlook are negative, the economy is in a recession.
  • In the downturn phase, the current assessment is positive, whereas expectations are starting to decline.
  • The upturn phase looks exactly the opposite. While the current assessment is still negative, expectations are decidedly more optimistic.

As the chart below suggests, the German economy is currently in a boom phase.

Sources: EAM, Datastream


What does that mean for the markets?

The table in the following shows the average return of shares (MSCI Germany) and of 10Y German government bonds (Datastream Benchmark 10Y Total Return index) from January 1992 to June 2017, broken down by phase. In a boom phase as described above, shares would yield and average return of 14.6% per year, while government bonds would only yield 2.5% per year.

More interesting than the absolute figures is the ratio of return and risk indicators throughout the various phases. We can see clearly that shares have very low risk/return ratios during downturn and recessionary phases. These, in turn, are the phases when government bonds would show particularly attractive return/risk ratios.

Performance of the German equity market (MSCI Germany Total Return) and the 10-year-German-Government Bond market (Total Return Index) – 06/2012 – 06/2017

Source: Thomson Reuters Datastream; 3.7.2017
Please note that past performance is not a reliable indicator for future developments.


Performance and risk (i.e. standard deviation) for the German equity and bond market (1992-2017)   

Equities Recession Expansion Boom Downturn
Monthly performance 0.1% 2.0% 1.2% -0.6%
Monthly risk (std. deviation) 7.0% 6.0% 4.2% 6.4%
Annualisierte Performance 1.6% 23.8% 14.6% -7.2%
Annual risk (std. deviation) 24.3% 20.7% 14.4% 22.2%
Return/Risk-Ratio 0.07 1.15 1.01 -0.33
Bonds Recession Expansion Boom Downturn
Monthly performance 0.8% 0.4% 0.2% 1.0%
Monthly risk (std. deviation) 1.6% 1.5% 1.5% 1.8%
Annualised performance 9.1% 4.4% 2.5% 12.0%
Annual risk (std.deviation) 5.7% 5.2% 5.3% 6.4%
Return/Risk-Ratio 1.60 0.85 0.47 1.89

Sources: Erste AM, Datastream; calculation based on monthly data

Please note that past performance is not a reliable indicator for future developments.

 As pointed out earlier, the business-cycle clock currently shows a clear boom phase. Therefore, you would want to invest in shares rather than bonds. This is one of the reasons why the weighting of shares is currently high while bonds command a very low weighting in the asset allocation of our mixed funds.

What is the outlook for the economy?

The image of the clock implies an ongoing nature – clocks keep turning.  Booms are followed by downturns. However, there are no signs for that in Germany at this point in time. In view of the extremely loose interest rate policy in the Eurozone, where the ECB has to keep in mind the average parameters of the euro area countries, nothing suggests that the ECB would want to rain on the German economic parade. From my point of view, Germany is therefore likely in for a hot summer –not only literally, but also in terms of economic performance.


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This document is an advertisement. All data is sourced from ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. unless indicated otherwise. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and for ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. pursuant to the provisions of the AIFMG in connection with the InvFG 2011 and regarding ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. published in Amtsblatt zur Wiener Zeitung or at the web site or .

The fund prospectus, Information for Investors pursuant to § 21 AIFMG and the key investor document/KID can be viewed in their latest versions at the web site or or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the key investor document/KID is available, and any additional locations where the documents can be obtained can be viewed on the web site or .

This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

Gerold Permoser

Gerold Permoser has been Chief Investment Officer at Erste Asset Management since early April 2013. He is responsible for all asset management activities and investment strategies for all investment funds held by the Erste Asset Management Group in Austria, Germany, Croatia, Romania, Slovakia, th...


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