Introduction

Festive Forecasts – 2018 reviewBy Anthony Warr

A hallowed media tradition in this season is to provide a neat summation of the 12 months just gone and to ask experts to share their “outlooks” for investment markets in the year ahead. How much faith should you place in these forecasts?

Festive Forecasts – 2018 review By Anthony Warr

antthony warr

A hallowed media tradition in this season is to provide a neat summation of the 12 months just gone and to ask experts to share their “outlooks” for investment markets in the year ahead. How much faith should you place in these forecasts?

One way of answering that question is to look back 12 months to see what the media’s favoured forecasters were expecting for the year just gone—in this case, 2018.

So, for instance, a survey of economists, published in February 2018, said the only direction for Australian interest rates in the approaching year was up. In fact, the majority saw cash rates as rising by at least a quarter percentage point.[1]

As it turned out, the Reserve Bank of Australia left its cash rate unchanged at 1.5% throughout the year. By December, with the housing market slowing and income growth stagnant, many of the same economists had pushed out their expectation for the first local interest rate rise until 2020.

How about currencies? Back in January 2018, in the annual Fairfax Business Day survey of economists, the average forecast for the Aussie dollar by the end of the year was 75 US cents. As it turned out, the currency ended the year well below there at 70.5c.[2]

Prediction is very difficult, especially if it’s about the future. — Niels Bohr, Nobel laureate in Physics

Similarly, equity market forecasts are typically wide of the mark. The median forecast for the S&P/ASX 200 in 2018 from the annual Fairfax survey was for a rise of 2.3%. By the end of the year, the index had fallen nearly 7% in price terms. In previous years, the same panel have been overly pessimistic. For instance, in 2013, the consensus forecast was for a rise in the index of about 3%. As it turned out, the market that year rose 15% in price terms, or nearly 20% on a total return basis.

Now, with another change in the calendar year, the focus turns to speculating about possible developments in 2019. There is plenty of material for the media to work with, including a range of opinions about the outcome of trade tensions, Brexit, interest rate cycles, geopolitics and commodity prices.

Of course, there is nothing wrong with having an opinion about any of these issues. What many investors often don’t appreciate, however, is that all those opinions, forecasts and expectations are already built into prices. Even if you were able to forecast events, you still need to anticipate how the market will react. So, what might seem an obvious call based on today’s information might look unrealistic six months later.

In truth, even the economists who participate in media surveys about the outlook for the coming year will admit that their forecasts rest on a myriad of assumptions, any one of which can quickly come undone. Ultimately, there are just too many variables, inputs and noise to make market forecasting anything other than an educated guess.

While today’s world news is often interesting, it is very difficult to build a sensible investment strategy by using the news to forecast movements in currencies, interest rates and share prices.

An alternative is to focus on what you can control, rather than what is interesting. Like how you allocate your investments across various asset classes like stocks and bonds, property and cash, how you diversify your investments across sectors and countries and currencies, the attention you pay to fees and taxes, and whether you regularly rebalance your portfolio. These are all things you can control.

As much as the media might want to pretend otherwise, the truth is no-one knows what the future will hold. That’s the bad news. The good news is you can be prepared, rather than having to repair!

Please contact us if we can be of assistance on (03) 99350970 or info@warrhunt.com.au.

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Sources: Morningstar, DFA Australia Ltd.  WARR HUNT acknowledges the assistance of Jim Parker in writing this article.

[1] ‘The Only Way is Up: Brace for a Rate Rise this Year, Most Economists Say’, Sydney Morning Herald, 2 February 2018

[2] ‘How the Business Day Economic Panel Sees 2018’, Sydney Morning Herald, 3 February 2018.