Germany has long been a relative island of stability in the European sea of troubles. Indeed, I’ve advocated for a little over two years that investors overweight the country.

In that time, the MSCI Germany Index is up 7.35%, versus the rest of Europe which has inched up 1.41% in that time. In 2012 alone Germany has risen 28%.

But now I think it is time to revert to a neutral or benchmark position.

Here’s why:

1) Recent signs of a slowdown in the German economy. While Germany remained exceptionally resilient for most of 2012, there is growing evidence that Europe’s troubles are starting to catch up with its largest economy.  The most recent reading for German retail sales was a drop of 3.6%. With retail sales collapsing, German consumer discretionary companies, which comprise the biggest weight in the index, may disappoint in the coming quarters.

2) This is not likely to be a one-quarter slowdown. The economic consensus is that German GDP will remain weak, defined as less than 1% growth, for the next several quarters. Our own in-house forecast is even more pessimistic, estimating basically no growth for Q4.

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