Each half, as part of our outlook for the coming six months, we provide a series of “anti-forecasts” for what will NOT happen over this period. In one sense, this is a light-hearted way to approach the vagaries of forecasting to look at things from the opposite perspective. But on a deeper level, it serves the purpose of helping to narrow our investment horizon by ruling out things that we think are unlikely to happen to allow us to better understand things that may happen.
If you are interested in better forecasting – and if you invest in markets yourself you should be! – then the Harvard Business Review put together a nice article here and we have recommended this book (Superforecasting) before.
Here is the performance of our last set of “anti-forecasts” over this half that just ended.
Emerging markets will NOT finish the year higher than current levels
MISS! Off to a bad start for the predictions. The Emerging Markets rally carried on, to finish up 34%. It also broke records for low volatility: we now have a new benchmark for Emerging Markets with a year of no 10% falls in it. This had not happened before. A buy, hold, and forget year.
Australia will NOT cut interest rates this year
HIT! The interest rate market has done a full 180-degree turn and is now pricing hikes for next year. Incredibly strong job growth, even with low wage growth, has set the scene for a debate over when first hikes are, rather than cuts.
Chinese credit tightening will NOT jeopardise the Chinese economy
HIT! One of the biggest stories of the second half of 2017 was to see global GDP is growing strongly, without being dependent on China. This has allowed Beijing to tighten in focussed areas, with the economy still able to grow. This has turned out to be a potent mix for Chinese equities.
Global bond markets will NOT crash
HIT! US Bond yields started the half at 2.3%…and finished at 2.3%. A snooze-fest. With shorter term rates rising, this says yield curves flatten, but it was a potent mix for equities.
Japan will NOT underperform global markets
HIT! After a slow start, Japanese equities roared home, rising 12% since September to outperform global markets. Good global growth and Abe’s success in the elections drove renewed interest in Japan.
Scoring 4/5 was one of our better performances on anti-forecasts and a definite step-up from this time last year where we scored a paltry 2/5.
So here are our predictions of what WILL NOT happen by June 30th, 2018.
European banks WILL NOT be a graveyard for investors (Deutsche Bank to outperform world stocks)
If our call for continued strong European and global growth plays out in the first half, maybe, just maybe, the concept of paying to own European Bonds may lose its allure. Combining this with growing credit demand and the passing of peak regulation, we could see an explosive rally in even the most unloved of European banking stocks.
The Australian dollar WILL NOT go anywhere (i.e. stay in a range of plus or minus three US cents)
One risk of forecasting is the need to believe that something always happens. Often nothing does! 2018 could see competing forces. Probable positives for the Australian dollar include robust growth, rate hikes from the Reserve Bank of Australia and a continued diversification by international investors from US dollars into other currencies. Opposing this we see slowing growth in commodity prices hurting Australia’s terms of trade combined with US rate rises. In this tug-of-war is an Australian dollar that stays relatively flat, a rare outcome for such a volatile currency!
Global growth WILL NOT falter
The synchronised expansion has more room to run. Global growth’s strength and breadth show little in the way of abating, and while we expect the impacts of US monetary tightening to start showing, we do not expect it to derail the positive forces at play – US tax reform, strong global trade and business optimism.
Weak Australian consumers WILL NOT buckle the Australian economy
Current concerns around weak Australian retail are overdone. The ongoing positive global and local business backdrop combined with positive fiscal developments in Australia will encourage the consumer to refrain from slowing spending any further.
Pakistan WILL NOT lose to India
Sadly, no test matches are planned between the two nations until December 2019. However, after a horror 2017 for the Pakistani stock market, and an excellent one for India, prospects for a change of leadership look strong in these terms at least.
Even by its own standards, Pakistan is now cheap on almost any metric – and despite a year of political turmoil and Trumpian attacks both corporate earnings and economic growth prospects remain solid.
By contrast, valuations in India are now exceptionally elevated. This has recently been reflected in foreign investors trimming their holdings, whereas in Pakistan there are early signs of a return.
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Chad co-founded Morphic Asset Management in 2012. As a stock picker Chad is also a generalist but has strong regional knowledge of Europe and the Americas. He has also been awarded the CFA Charter.