Nine Experts and Three Surprises
Nine Experts and Three Surprises – Making Predictions
In 2017, we were again reminded of the importance of following an investment approach based
on discipline and diversification vs. prediction and timing. As we gear up for the new year, we can look at several examples during 2017 that provide perspective on what guidance investors may want to follow, or not follow, in order to achieve the long-term return, the capital markets offer.
Each January, a well-known American financial publication invites a group of experienced investment professionals to New York for a lengthy roundtable discussion of the investment outlook for the year ahead. The nine panellists have spent their careers studying companies and poring over economic statistics to find the most rewarding investment opportunities around the globe.
Ahead of 2017, the authors of the publication’s report were struck by the “remarkably cohesive consensus” among the members of the group, who often find much to disagree about. Not one pro expressed strong enthusiasm for US stocks in the year ahead, two expected returns to be negative for the year, and the most optimistic forecast was for a total return of 7%. They also found little to like in global markets, citing “gigantic geopolitical issues,” including a Chinese “debt bubble” and a “crisis” in the Italian banking system.
The excerpts below summarising the panel’s outlook presented a less than optimistic view of the year ahead in January 2017;
“This could be the year when the movie runs backwards: Inflation awakens. Bond yields reboot. Stocks stumble. Active management rules. And we haven’t even touched on the coming regime change in Washington.”(1)
The outcome of these predictions: Zero-for-four, although some might point out that at least they got the direction right regarding the inflation rate;
Inflation barely budged, moving to 2.17% for the January–November 2017 period, up from 2.07% for the year in 2016.(2)
The yield on the 10-year US Treasury note did not move up but instead slipped from 2.45% to 2.40%.
Stocks moved broadly higher around the world, in some cases dramatically. Twenty out of 47 countries tracked by MSCI achieved total returns in excess of 30%.(3)
According to Morningstar, the average large blend US mutual fund underperformed the S&P 500 Index by 1.39%, and the average small company US mutual fund underperformed the S&P 600 Index by 1.35%.
The above-mentioned panel was no aberration. Among 28 economists polled by Financial Times, for example, more than two-thirds anticipated parity between the Euro and the US dollar in 2017.(4)
Expert or not, there is little evidence that accurate predictions about future events, as well as how the market will react to those events, can be achieved on a consistent basis.
Question: What do you get when you combine a tumultuous year for the UK, a new US president and precedent-setting elections across Europe?
Answer: New all-time highs in both European and US stock markets. During the year, a great deal of media coverage was focused on markets reaching new record highs, and some investors braced themselves for a sharp drop in stock prices.
Not only did the much anticipated “correction” never occur, financial markets remained remarkably calm. Out of more than 250 trading days in 2017, the total return of the MSCI Europe Index rose or fell over 1% only 18 times and the return of the S&P 500 Index only eight times. By comparison, in a more rambunctious year such as 1999, the S&P 500 Index did so on 92 days.(5)
North Korea issued threats of a nuclear missile strike throughout the year and boasted that even mainland US cities were vulnerable to its newest warheads. Next-door neighbour South Korea would seem to have the most to lose if such a catastrophe occurred, but Korean stocks were among the top performers in 2017, with a total return of 29.5% in local currency and 46.0% in US dollar terms.(6)
To many experienced researchers, Chinese stocks appeared alarmingly vulnerable. A gloomy November 2016 article (7) warned that “China’s debt addiction could lead to a financial crisis.” In the article, a prominent Wall Street strategist observed:
“It’s scary that China seems to be continuing its debt binge to achieve its unrealistic growth targets.”
And a global fund manager noted: “We are the most underweight China we have been since launching the fund five years ago.”
The outcome - China was the third best-performing stock market in 2017 with a total return of 51.6% in local currency and 50.7% in US dollar terms.(8)
While some of these examples may seem counterintuitive, the above “surprises” from 2017 reinforce the challenge of drawing a direct link between positive or negative events in the world, and positive or negative returns in the stock market.
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. Diversification neither assures a profit nor guarantees against loss in a declining market.
1. Lauren R. Rublin, “Stocks Could Post Limited Gains in 2017 as Yields Rise,” Barron’s, January 14, 2017.
2. Inflation data © 2018 and earlier, Morningstar. All rights reserved. Underlying data provided by Ibbotson Associates via Morningstar Direct.
3. As measured by the MSCI All Country World IMI Index (net dividends).
4. Claire Jones, “Economists Expect Euro to Fall to Dollar Parity in 2017,” Financial Times, December 30, 2016.
5. MSCI Europe Index (net dividends), calculated in EUR. MSCI data copyright MSCI 2018, all rights reserved. S&P 500 Index data calculated in USD.
S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
6. As measured by the MSCI Korea IMI Index (net dividends). MSCI data © MSCI 2018, all rights reserved.
7. Jonathan R. Laing, “China’s Debt Addiction Could Lead to Financial Crisis,” Barron’s, November 5, 2016.
8. As measured by the MSCI China IMI Index (net dividends). MSCI data © MSCI 2018, all rights reserved.