OUR PERSPECTIVES


FY2014: The “Experts” were Wrong Again

In around June and July each year we see a raft of media commentary about investment returns for the year that has been, as well as the views and opinions of investment “gurus” for the year ahead.

I can’t help reading these assessments and forecasts, but when I do I always have a sense that there is a mismatch between the credibility with which these forecasts are framed, and the likely probability that these forecasts are of any value whatsoever to investors.

At Minchin Moore we have a habit of recording each year what the experts are forecasting. Such is our analytical mindset, we then look back at the forecasts a year later with a view to determining their accuracy.

Our findings have been consistent over time, and FY2013/14 was no exception. So let’s take a look at what the experts said, and what actually happened in FY2014:

Key Market Predictions (espoused in June 2013):

 

Bonds (Consensus Forecasts):

  • Rising interest rates in the US will put downward pressure on bond prices.
  • “We are looking at possibly the worst year for bonds in many years.”
  • Many analysts were suggesting exiting bonds completely.

 

Bonds (Actual):

  • Expectations for rises in rates eased over the year, allowing bonds to have another strong year.
  • The most widely followed bond index, the Barclays Global Aggregate, returned 7.8% for the year (hedged to AUD). Not bad when the cash rate is at 2.5%.

 

Australian Dollar (Consensus Forecasts):

For most analysts there was no question that the AUD would fall against the USD, the only question was by how much it would fall.

 

Australian Dollar (Actual):

The AUD rose against the USD. Actual movement for the 12 months was from around $0.91 to around $0.94.  This meant “hedged” global equities outperformed unhedged global equities (again).

 

Australian Shares (Consensus Forecasts):

  • In the previous year (FY12/13) the Aussie equity market delivered a return of 22.8% (including dividends). After such a strong year, analysts were convinced that this couldn’t go on, that the run had seen its day.
  • FY2014 was to be a year of modest single digit returns.

 

Australian Shares (Actual):

  • In FY2014 Australian shares delivered a total return of 17.4% (including dividends).
  • Market forecasts are inherently unreliable, to the point that we can find little in the way of credible evidence to suggest that collectively these forecasts can help investors turn an abnormal profit.

 

One of our favourite forecasts/assessments is this one from the IMF:

“The banking system’s reported financial indicators are above minimum regulatory requirements and stress tests suggest that the system is resilient.”

IMF, Iceland: Financial Stability Assessment – update, 19 August 2008, p5