Our macro anti-predictions for 2017
Each half, as part of our outlook for the coming six months, we provide a set of “non-predictions” for things we think will not happen in the coming half. Often, predicting what won't happen is somewhat easier than predicting what will happen. This helps narrow the focus of what to look for in the coming half. In January, we outlined five "anti-forecasts" that we reviewed in our latest Half Yearly report for our Global Opportunities Fund.
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 listing the six most important rules for effective forecasting and we have recommended this book (Superforecasting) before.
Scorecard for the first half of 2017
- The oil price will NOT finish the half higher than where it started.
HIT! With oil falling from $56 to $48 over the half, or 14%, this was a successful call. We wrote that the issue for OPEC was likely to be the rapid response from US shale oil. So it transpired that OPEC cuts failed to offset US production increases.
Figure 1 - Oil price since January 2017
- Emerging Markets will NOT outperform Pakistan.
MISS! Emerging Markets outperformed Pakistan by over 25% over the half. In markets, sometimes it’s “better to travel than arrive”, and the local sellers have outweighed any prospective pick-up of inflows from Pakistan’s promotion to Emerging Market status. Increased taxes in Pakistan on capital and a currency devaluation also haven’t helped nor has an investigation into the Prime Minister.
- Economic policy uncertainty will NOT abate.
MISS! The economic uncertainty index we used here actually fell over the half. Whilst hard to pin a reason on why, given a potential impeachment in the US, successful French and Dutch election victories for mainstream parties probably helped.
- Negative rates will NOT disappear
HIT! Japan and Europe remain in their negative rate settings. The Trump spike in yields abated over the half and the year on year effects from the oil price increase have turned negative, leading to lower CPI. This means they are unlikely to be hiking soon.
- Europe (Eurostoxx 600) will NOT underperform the US market (SPX).
HIT! Europe rose 14% in USD terms versus 8% for the US market over the half. Most of what we outlined played out: GDP data improved and money flowed in searching out the cheap valuations. What was somewhat unexpected was this was done with a stronger Euro, breaking the nexus of the inversely relationship between the Euro (fall) and local markets (rise).
The good news is that 3/5 is a decent hit rate for the half. The bad news was the Fund closed out some of the winning positions earlier in the half, thus not fully maximising gains from these calls.
So here are our predictions of what WON’T happen by December 31st, 2017.
- Emerging Markets will NOT finish the year higher than current levels.
Goldman Sachs recently published a fascinating statistic on Emerging Markets volatility, noting that every year there has been at least a 10% fall, without fail. With Emerging Markets up 18% already this year, we’ll back history to hold true to form and see at least a 10% fall from here, that will see Emerging Markets up for the calendar year, but lower than their highs.
Figure 2 - Yearly drawdown of Emerging Markets equities since 1997
- Australia will NOT cut interest rates this year.
The market is pricing in a very small chance of a rate cut this year. We think the hurdle for the RBA to cut rates here is very high, given its concerns about the housing bubble. Next year it will probably have to cut, but find itself cutting too little and then too late.
- Chinese credit tightening will NOT jeopardise the Chinese Economy.
Ongoing monetary and regulatory tightening is seen as one of the largest risks to global financial markets. The tightening is a deliberate policy move to help manage the leverage in the economy. The Chinese Central Bank and regulators have a handful of powerful levers at their disposal as well as political sway on bank lending and are well placed to manage this stage of their ongoing transition. Scored by credit not widening beyond 8% over Government yields.
- Global bond markets will NOT crash.
Bond market yields remain low by historical standards. While Central Bank money printing is often blamed, the structural low growth low inflation world explains most of the current levels. With the Federal Reserve on a steady and predictable course, only strong inflationary pressures or rising productivity could provoke a material sell-off in bond markets. US 10 year yields will not finish the half over 3.25%.
- Japan will NOT underperform global markets.
As we noted in a series of blogs in recent weeks, the mind set in Tokyo has gone from the hubris of the 1980s to a state of permanent gloom. We believe low valuations and low expectations, plus signs we are on the verge of a pick-up in wage levels could see the start of some material and maybe protracted outperformance for Japanese equity markets.