As Australia heads into a new financial year, the experts are full of advice for investors on what the coming 12 months will bring. But before acting on the speculation it might be wise to look back on how last year’s forecasts panned out.
Going back to the end of the 2018 financial year, a survey of economists put the chance of a rate rise in the coming 12 months as an even money bet.1 In fact, 23 out of 26 economists expected rates to have risen by the middle of this year. The RBA did change the cash rate a year later, in June 2019. But the move was down, not up. And it followed that up a month later with another one.
The same panel of economists expected the Australian dollar to end the financial year at 74 US cents, however the currency spent most of the year in continuous decline, ending around 69 US cents. A level that only one of the 26 economists predicted.
The average forecast was for the S&P/ASX 200 index to be essentially unchanged in the financial year. As it turned out, the index rose just under 7% over the year in price terms. In total return terms, it gained more than 11% and ended the year just 2% below the record highs it struck in October 2007.
Now, 12 months later, we are seeing a new round of forecasts for the year ahead. To be sure, there is plenty of uncertainty out there. Alongside ongoing trade tensions between the US and China, there are Britain’s struggles with Brexit ahead of an October 31 deadline for a deal, record low government bond yields and sluggish income growth in many countries.
The fact is markets are always confronting uncertainty in one form or another. As we’ve seen, forecasting financial markets with consistent accuracy, even for the experts, is extremely difficult and not something that is likely to form the basis of a sound investment strategy.
Of course, everyone is entitled to their opinions about what might happen in the markets in the coming year and beyond. But we have seen that even the people whose job it is to make forecasts about markets struggle to get it right.
The fact is, you don’t need to be an expert to benefit from the opportunities that markets present. That’s because markets do a pretty good job of incorporating all the information you read about in the news every day.
Instead, you could focus on you and your family, and the financial elements within your control. Things like designing your strategy around liquidity needs, capacity to invest, diversification in your portfolio, fees you pay and exercising discipline to ensure you remain on track.
Fortunately, you don’t need a crystal ball after all.
__________________________________________________________Sources: WARR HUNT acknowledges the assistance of Jim Parker in writing this article. 1 "Rate Rise an Even Money Bet" , Sydney Morning Herald, June 29, 2018.