4th December 2013
Most people know it is Christmas because sexy monochrome adverts for perfume and unbelievably expensive full colour child-friendly commercials for high street stores fill television screens.
Investors have an additional prompt for the festive season. They are hit with a torrent of fund manager forecasts for the coming year. But do these have any validity or are they just a way of filling media space and investment guru time in what might otherwise be a quiet time of the year?
And do many resemble newspaper horoscopes – written so vaguely and so widely that readers can always find something to justify perusing them (or phoning their premium rate lines)? Some of the forecasts are so macro that they can mean anything to anyone. It’s rare to find an end of year prediction that goes into sectors, let alone individual equities.
Tony Levene has looked at some of the forecasts for 2012 for Mindful Money – and compared them against the reality so far in 2013 and given them marks out of ten. It’s not, admittedly, scientific.
For reference, figures from Trustnet show how the average OEIC in main sectors performed for UK investors in sterling terms.
UK All Companies (equities) + 26%
North America Equities +24.8%
Japan Equities + 32%
European Equities (excluding UK) + 30.8%
Global Emerging Markets (equities) + 3.6%
Global Bonds – 0.8%
Sterling Corporate Bond – 1.5%
It’s very clear. Whatever you were doing a year ago, you would have done well to have ditched bonds and emerging market equities. Although there are obvious variations among individual fund managers, a spread of equity funds in mature markets would have give a return of around a quarter to a third. So which forecasters spotted this? Here’s some of their comments from a year ago (plus Mindful Money marks out of ten).
Andrew Wilson, at adviser Towry, said: “A welcome return to investing on fundamentals, as underlying stock correlations fall, will also benefit stock pickers and those who can also go short. Finally, the possibilities in China and Japan have already become hideously consensus, with all that that entails.” Not bad – but failed to spot Japan’s excellent performance. A creditable 7/10
Fund managers ING: “2013 won’t be much different from 2012. There has been a lot of damage to balance sheets.” Wrong. 2/10 “The case to move from credit to equity is building but there is no institutional appetite yet.” Wrong 3/10. “Equities are more attractive in value than over the past 20 years.” Very right 9/10.
Allan Conway, Head of Emerging Market Equities Schroders:
“We expect emerging market equities to deliver solid performance during 2013 and perform even better over the longer term. There are several reasons for this. First, taken in isolation, GEMs look extremely attractive in terms of valuations, both absolute and relative to history as well as on a market capitalisation to GDP basis. Moreover, in terms of market capitalisation to GDP, emerging markets are trading at more than one standard deviation below the historic average. This measure has usually been a very good indicator of long term over- or undervaluation.”
Too early to judge the longer term but “solid performance”? Over-optimistic 3/10.
Tom Elliott, global strategist at J.P. Morgan Asset Management on the UK market: “However, for investors in UK assets the outlook is a little more optimistic. Continuing negative real rates on ‘risk free’ assets will continue to support UK equities, particularly those offering a good dividend yield. The FTSE 100 will continue to be more influenced by the global environment than by the domestic, and should therefore benefit from (we hope) progress in Washington over the fiscal cliff, continued progress on a solution to the eurozone crisis, and a re-acceleration of the Chinese economy.”
Could have been more positive but a creditable 7/10.
Dan Morris, global strategist at J.P. Morgan Asset Management comments on the global outlook:
“Could 2013 be the first “post-crisis” year for markets? Some signs are very encouraging. The risk of a chaotic breakup of the eurozone has clearly receded and not only because of more forceful intervention by eurozone leaders (however tardy). The economic imbalances that precipitated the crisis are also correcting. Italy and Spain are running trade surpluses with the eurozone. Greece’s primary budget (before making interest payments) is in surplus year-to-date. A more benign environment in Europe will be supported by ongoing liquidity from the US Federal Reserve. This liquidity will provide support for risk assets generally, but in particular equities (both in the US and emerging markets) and indirectly higher yielding fixed income as investors look to alternatives to investment grade debt for yield.”
Excellent on equities but let down by an enthusiasm for emerging markets. 7/10
Robert Talbut, chief investment officer at Royal London Asset Management:
“Low risk assets with low returns are expensive and the risks are increasing as the results of austerity disappoint. Corporate bonds have performed extremely well and while still delivering reasonable returns, cannot repeat recent years’ experience, while gilts are richly valued and probably only make sense for fresh investment under a depression type scenario and the risks to this are increasing. Despite being a more volatile asset class equities are an increasingly attractive option, where the risk/reward profile is more favourable than other assets, and should make up a rising share of investor portfolios.”
Right on equities and bonds but wrong on the detail of the depression type scenario. 8/10.
David Coombs, Head of Multi-Asset Investments, Rathbone Unit Trust Management
“We are constructive on equities and will selectively increase our exposure. Indeed, we expect more of a dislocation between equity markets and economies, whereby market could still move higher next year, despite macro-headwinds. Equity volatility has technically been quite low; however, this is something we expect to rise next year, which could lead to violent rotations in sectors. This will see the shift from simple RoRo (Risk-on/Risk-Off) movements to RaCy (Rapid Cycling), where cycles will be quicker and much more pronounced. We favour US equities over the UK, and emerging markets.”
Creditable although too bearish over the UK (which is important for his sterling based clients). 7/10.
So what about individual investors? Did they fare better?
Saga Share Direct went for a crowd-sourcing solution, polling 8,402 share buying customers on how the FTSE 100 index will perform in 2013. The survey shows that 28% believed that the FTSE 100 would be higher in 12 months time, 36% think it will be about the same and 16% think it will be lower.
Over the year, the index gained around 750 points to nearly 6,700. Not too bad 6/10.
So what is the overall verdict on last year’s forecasts? Well it looks like a mixed bag with most missing out on Japan, getting it wrong on emerging markets but correctly calling the move out of bonds and into equities.
Should we take any notice of these? One charitable (it’s that time of year!) way of looking at them is that they represent a mainstream consensus at the time they are written. Investors do need to know what the big investment houses forecast.
Adrian Lowcock, the investment expert at Hargreaves Lansdown says: “It’s some forward guidance but they can’t forecast what might happen over the next year. Long term equity markets tend to grow at around five per cent a year so it is generally fine to predict a shares move up. Some of the forecasts rely too much on macro-economics. It’s more of case of trying to work out how investor cash flows will move, so follow the money.
“For most private investors, one year is too short a term. There are some basics hidden in these forecasts such as it is better to buy into a cheap market than one that is already expensive. Forecasting is a bit of a mug’s game and, of course, fund managers do not look at calendar years. But it is a popular pastime! However, it’s really down to those known unknowns, those unknown unknowns and the unknowable unknowns.”
Or at prime minister Harold Macmillan may or may not have said: “Events, my dear boy, events”.