Did equities not receive the memo about Germany recently? Whilst German gross domestic product (GDP) fell -0.3% in 2023 and -0.2% in 2024, the MSCI Germany Index rose 19.8% and 17.6%, respectively, in those years.[i] How can GDP shrink yet equities soar? Fisher Investments UK reviews a few reasons.
GDP reflects the past, but we find equities look forward. GDP is a backward-looking, government-produced snapshot of economic activity that already happened (e.g., the past month or quarter). It captures transactions that occurred and the prices they exchanged at but doesn’t reveal what tomorrow holds.
Meanwhile, equities look forward at the potential for profits over the next 3 – 30 months based on Fisher Investments UK’s reviews of markets. This is because equities give owners a corresponding share of publicly traded companies’ future earnings. Further, equity prices incorporate perceptions of those future earnings, in our view. We find when actual earnings turn out better than perceived, equities tend to move higher, and vice versa. Economic growth matters to equities, but largely to the degree it influences companies’ earnings in the foreseeable future.
In practice, we think this means equities usually move ahead of the economy, peaking before economic contractions and troughing before they end. Exhibit 1 depicts this in 2020 and 2022, when German equities fell before economic releases indicated GDP downturns and rose ahead of reports signalling recovery.
Exhibit 1: German Equities Moved Ahead of GDP
Source: FactSet and Destatis, as of 15/1/2025. MSCI Germany returns with net dividends in euros, 31/12/2019 – 31/12/2024, and German GDP, Q1 2020 – Q4 2024.
German equities peaked on 19 February 2020 and troughed 18 March – several weeks before 15 May’s Q1 2020 GDP report indicated contraction.[ii] When Fisher Investments UK reviews that time period, we found equities rapidly registered COVID lockdowns’ likely big near-term hit to economic growth, along with a wider range of potential negative longer-term scenarios. Then, when it became clearer reality would probably avoid the worst possible outcomes – reducing uncertainty – we think equities began to rebound – and continued doing so even through Q2 2020’s subsequent GDP plunge. In our view, equities had priced it the probable fallout already and were looking ahead – correctly, in hindsight – to economic recovery.
Later, we think German equities began anticipating 2022 GDP weakness as early as late 2021. German markets fell amidst escalating supply-chain disruptions, rising energy prices and reports of Russian troops massing along Ukraine’s border.[iii] Equities dropped further in the wake of Russia’s late-February 2022 invasion as alarm mounted over the war’s possible impact, the potential for it to spread and the ECB’s sudden turn to rate hikes aimed at reining in soaring inflation – even as German GDP rose cumulatively in 2022’s first three quarters.[iv] But German equities troughed on 29 September 2022, months before its Q4 2022 GDP showed contraction at January 2023’s end.[v] Despite choppy and overall slightly shrinking output since, equities have climbed.[vi]
How could this be? To our thinking, equities pre-priced a potentially deep, prolonged economic contraction throughout 2022. Reality, in our view, proved less severe than many experts we follow projected. Since then, publications Fisher Investments UK reviews still widely cast Germany as the Sick Man of Europe. Fisher Investments UK’s review of the situation suggests this negative sentiment lowers expectations of companies’ future profitability, making positive surprise easier to attain.
Another reason equities don’t move in lockstep with GDP: much of the economic activity represented in GDP isn’t reflected in the equity market. Take Germany’s renowned Mittelstand – family-owned small and midsized businesses – which make up the largest share of its GDP.[vii] They may be the backbone of the German economy, but because they are privately held, they are non-existent amongst publicly traded equities. Fisher Investments UK’s review of Germany’s equity market finds it is mostly made up of larger multinational corporations. Consider: 80% of the MSCI Germany Index’s revenues come from abroad versus 20% domestically.[viii] Under such circumstances, global economic trends can often be more influential than local ones.
Moreover, economics isn’t equities’ only driver, in our view. Politics factor in, too. According to our research, equities care less about politicians’ personalities and more about what they can (and can’t) do. If the government looks likely to change the rules (e.g., increased regulation), that could discourage risk-taking. It could curtail businesses’ plans to expand. It could change taxes, rules and regulations that quite directly (or indirectly) raise costs. Or actions could dissuade or block some sales. Hence, political actions can affect profits, too, and they can cloud outlooks with uncertainty to boot. Conversely, we find when gridlock reigns – like it does throughout much of Europe – political risk falls.
Outlets Fisher Investments UK reviews often overlook this, typically casting government inaction negatively. But political gridlock provides a stable legal and regulatory environment that can help equities look at the profit picture further ahead. It may not be ideal, but we don’t think equities need perfect conditions, which aren’t realistically likely anyway.
German GDP may have dipped for two years, but that hasn’t dictated equities’ direction. According to our analysis, less bad than supposed results are good enough to allow equities to keep rallying – regardless of GDP.
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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
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[i] Source: Destatis and FactSet, as of 15/1/2025. German GDP, 2023 – 2024, and MSCI Germany returns with net dividends in euros, 31/12/2022 – 31/12/2024. GDP is a government measure of economic output.
[ii] Source: FactSet, as of 15/2/2025. MSCI Germany returns with net dividends in euros, 31/12/2019 – 31/12/2024, and German GDP, Q1 2020 – Q4 2024.
[iii] Ibid.
[iv] Ibid.
[v] Ibid.
[vi] Ibid.
[vii] “Germany’s Mittelstand: Foundations of Economic Strength and Innovation,” Hongyi Gao, The Diplomatic Affairs, 3/11/2024.
[viii] Source: FactSet, as of 15/2/2025.