Hostages to Fortune: Our scorecard for Jul-Dec 2016
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 you think are unlikely to happen to allow you 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.
Market participants will NOT be right to be bearish. Instead: new highs.
HIT! It was the most controversial of our calls in July and we even published it on Livewire, so we could have looked foolish. It is with no small degree of vindication that we write that the S&P 500 is 7% higher. The “Trump bump” was unexpected, but markets often go where they want to go and then justify it afterwards. With so much cash on the sideline, participants were “pulled into the market”.
Figure 1 – S&P 500 2016 returns normalized at 30th of June
The Federal Reserve will NOT cut rates this half.
HIT! It seems difficult to imagine now, but at one point in June the market was pricing a Federal Reserve rate CUT in the second half of 2016. In the end, the Federal Reserve went the other way with a rate increase which was contingent on stronger markets and continuing employment growth.
US yield curve will NOT steepen materially from here. (Judged by 20bps steepening between 2-year and 10-year bonds).
MISS! Another Trump casualty. The hope that drove the market to new highs and success in our first call, came with substantially higher long dated yields as markets moved to price his expansionary fiscal policies that will result in both more growth and inflation. In the end the curve steepened by 37bps over the half.
Figure 2 – US 2 year bonds – 10 year bonds
Eurozone bank woes will NOT be resolved this year.
MISS! Another part of the crazy year that was 2016. The Italian referendum result went the direction of anti-Europe; Monte Dei Paschi couldn’t get enough investors to recapitalize itself; and Deutsche Bank is staring down a huge fine from the USA Department of Justice … and yet the European Bank stock index is up 45%.
India will NOT underperform global markets this half.
MISS! After outperforming in the first few months, in November India suffered from a combination of external hits, via a Trump victory with a higher USD, along with a self-inflicted wound. Namely, the de-monetization programme under Modi has hit the Indian market, as the botched implementation has led to a lack of cash to complete transactions.
Figure 3 – SENSEX Index relative to MSCI AC World
Although 2 out of 5 is not quite half of our anti-forecasts, arguably the most important call (as it sets the tone of the whole portfolio) was right: the market direction.