German industry's new orders and order backlog vs. Dax

Sources: Bloomberg Finance L.P.; Haver, DWS Investment GmbH as of 5/10/23

How can this be explained? One possible answer could be that the expansion from 30 to 40 members has increased the proportion of service-oriented companies in the Dax. However, if you take a closer look at the new additions over the past two years, manufacturing is still the dominant sector. Rather, once again, this anomaly can be explained by distortions that occurred during the pandemic. In 2021 and 2022 inventories were higher than usual, as companies were bracing for uncertainties in global supply chains. Changing patterns in consumption and labor also led to surging investments in some sectors. At the same time, however, new orders increased exceptionally due to the foreseeable end of the Covid-19 measures and the resulting economic recovery. As a result, order books are still full to bursting despite weakening incoming orders, as the Chart of the Week shows. For February, the German Federal Statistical Office reported an average range of seven and a half months for the order backlog in the manufacturing sector. This is just below the record of eight months at the beginning of 2022, but well above the average of the past ten years, which was under six months.

Of course, this does not mean that one should simply overlook the weakness in new orders. But as long as these numbers don’t form a new trend, they support our economic picture for this year: no boom, no crash, rather a lackluster cycle. However, this would not explain why the Dax is trading close to its historic high. A better explanation could come from the development of profits: they hit a record high in the past year. And, if the analysts' consensus is to be trusted, further records will follow in 2023 and 2024. Even if one doesn’t share this positive view, we believe that at least in relative terms the Dax will outperform the global benchmark this year.