Manufacturing is the largest sector of the German economy. More specifically, the auto manufacturing industry is the largest in Germany. As a result, the German stock market tend to follow the auto industry.

The following chart shows how the German stock market is highly correlated to the auto industry:

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Cumulative total return since start of 2002. Source: Charles Schwab, Bloomberg data as of 10/27/2019.

Source: Will The Crash in Autos Drive The End Of This Cycle? by Jeffrey Kleintop, Schwab

Some of the important facts of the German auto industry are:

•  In 2018, the auto industry had a turnover of EUR 426.2 billion. That is around 20 percent of total German industry revenue.
• Germany is Europe’s top auto market – both for manufacturing and registrations of new vehicles.
• One in five cars worldwide carries a German brand.
• The majority of autos produced in Germany are for export. Last year the figure stood at 78 percent.
• Germany-based Volkswagen is the world’s number auto maker and seller with sales of over 10 million last year.

Source: Germany Trade and Invest

The key takeaway for equity investors is that German stocks tend to perform well if the domestic auto industry is growing.