Hostages to fortune: Anti-predictions for 2H 2019

Chad Slater

Ellerston Capital

“A good forecaster is not smarter than everyone else, he merely has his ignorance better organised.”


Each half, as part of our outlook for the coming six months, we provide a series of “anti-forecasts” for what will NOT happen between now and December 31st, 2019.

First, we must reflect on the performance of our last set of “anti-forecasts” over the half that just ended.


Emerging Markets will NOT underperform Developed Markets

Miss! Our optimism on Emerging Markets based on their better performance through the December sell-off proved to be misplaced. US dollar strength, further trade wars, and weaker economic data meant they lagged behind Developed Markets – mainly the US – again.

Short-Term Interest (2-year yields) rates will NOT be lower

Miss! The first line of the prediction started so well “a Federal Reserve that walks back on their rate hikes” – which was indeed the case. The rest was completely wrong. Rates markets are now pricing four rate cuts in the next 12 months, pulling the 2-year yields down dramatically over the half.

The US market will NOT finish below the December 2018 lows

Hit! A win and a comprehensive victory at that with nearly every part of this prediction on slower growth and a Fed backing off being correct. Equity markets did indeed climb this wall of worry, climbing even higher than we initially dared to believe.

Europe will NOT outperform Japan

Miss! With Europe largely tracking other global markets, it was the Japan part that was the disappointment here, with Europe up 15.8% (USD) and Japan only up 6.5% (USD) for the half. Japanese earnings have been caught in the downdraft of global growth concerns, with valuation providing no support.

Australia will NOT avoid political volatility, meaning another half of underperformance

Draw! When put in constant currency (so both in USD or AUD) the difference is less than 1%, but would be zero if dividends are added back. The meat of the call – a Labor party victory with higher taxes – was substantially wrong though. This and the Reserve Bank of Australia interest rate cuts driving money into yielding equities more than offset the weaker housing market and lower Australian dollar.

So, 1.5/5 – down there with some of our poor prognosticating halves, but the inverse of last year with the most important call – that equities rise – offsetting the hit rate.


We conclude this blog by looking at our predictions of what WILL NOT happen by December 31st, 2019.

The Federal Reserve will NOT cut interest rates three times (or 75bps) in 2019

Is the bond market the boss of the Federal Reserve? Or Donald Trump? Because either way, the divorce between the data and rate markets is huge. Consider this – the market is pricing more cuts than at the start of the GFC. Maybe we have one, but data will have to rapidly fall apart for that to happen.

Indian long-term bond rates will NOT end above 7%

Trend Inflation in India appears to have halved, to below 4%. At the same time, bond rates have only fallen to about 7%, which mean real interest rates in India are now some of the highest in the world. With economic growth declining – possibly to below 6%, the Reserve Bank of India has finally started to cut policy rates, but will probably have to cut much more than the market expects. Since the yield curve in India has historically always been quite flat, we believe these cuts will drag bond rates down with them, possibly to as low as 5.5% over the next twelve months.

Reported Chinese Growth will NOT fall below 6%

The Chinese are preparing for the “Long March” and will stand by their economy to help weather the storm. Should global trade continue to suffer, the Chinese will use their many tools to support both the economy and the stock market.

Brexit will NOT matter

Brexit headlines have made a resurgence in 2019 as the 3-year exit deadline came and ultimately got kicked down the road. Even in the event of a hard Brexit, global markets will be able to digest it (defined by less than 2% fall on the day of hard Brexit should it occur).

The Australian dollar will NOT finish below the current low of 2019 (67.4c)

It was the year a US President resigned in disgrace, rather than face impeachment. We are talking 1974, Watergate and Nixon. It was also the last time Australia ran a Current Account Surplus (CAS). With iron ore at record highs and a slowing domestic economy meaning lower demand for imports, Australia may just record its first CAS since 1974 later this half. It’s hard for CAS countries to have sharply weaker currencies, so with everyone short the AUD and despite domestic problems, the backdrop suggests downside is more limited for now. Let’s see if history repeats on the US President resigning.

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Chad Slater
Co Head Global Equities (ex-Asia)
Ellerston Capital

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.

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