This is the annual festival of forecasting, the time of year when every economist and financial analyst weighs in with his or her outlook for the year ahead.
It makes for great entertainment. Unfortunately, it doesn’t make for great investing.
One year ago, the best brains of Bay Street and Wall Street were advising investors to buy North American and emerging market stocks, to increase exposure to commodities and to avoid U.S Treasuries and their pitifully low yields.
The advice was logical – but not profitable. The recommended stock markets swooned. So did many commodities. U.S. Treasuries, on the other hand, enjoyed a banner year.
A bad year for forecasters? Actually it was pretty typical.
“Forecasting is notoriously unreliable over the long term,” says Eric Kirzner, professor of finance at the University of Toronto’s Rotman School of Management. “Last year [forecasters]overstated the mark. This year they may understate the mark, as forecasters tend to be very myopic.”
Even the best forecasters demonstrate little ability to make profitable predictions, according to Jason Hall and Paul Tacon of the University of Queensland. They found that the top third of forecasters over the past year are just slightly more accurate in the subsequent year than the bottom third of forecasters.
The past year demonstrated how predictions that look good in January can be tripped up by unexpected events. A Japanese earthquake in March threw markets into a tailspin. Then Europe’s debt crisis escalated dramatically and S&P issued an unprecedented downgrade advisory on U.S. debt.
In the U.S., pension managers had been expecting market gains of more than 7 per cent. Instead, the S&P 500 wound up essentially flat.
After being touted at the start of the year as the new drivers of global economic growth, emerging markets stalled. Indian and Chinese stocks plummeted 25 per cent and 21 per cent, respectively, and emerging markets as a whole tumbled about 19 per cent.
One of the biggest beneficiaries among asset classes of the “flight to quality” proved to be U.S. Treasuries. At the start of 2011, a survey of 56 economists predicted that Treasuries would be hit hard as yields, which move in the opposite direction to prices, rose from about 3.4 per cent in December, 2010, to 4 per cent by now.
The sentiment against T-bills grew so strong that Bill Gross, managing director of Pacific Investment Management Co. LLC, cut the Pimco Total Return Fund’s exposure to zero in February. But the $55-billion (U.S.) selloff by the world’s biggest bond fund was a bad bet. By yearend, the yield on 10-year Treasuries had slid to under 1.9 per cent and investors who held them for the full year enjoyed gains of about 17 per cent.
Commodities proved a mixed bag. During the first four months of the year, prices climbed close to records hit back in 2008, fuelled by China’s seemingly insatiable demand for copper, steel, coal, fertilizer and other key ingredients of economic expansion.
But by mid-year, it was becoming obvious that companies in China and elsewhere had begun to delay purchases in favour of drawing down inventories. By yearend the benchmark global commodity index, the S&P GSCI, had dwindled below where it began 2011.
Gold prices remained strong, though still off their high hit in September. The precious metal rose by 9.2 per cent during the year. But major gold producers saw their market prices move the other way.
The gap between gold prices and the share prices of producers may well close in the year ahead. But will that be the result of gold prices falling or shares rising? It all depends which forecast you believe.