OUR PERSPECTIVES


What will the markets do this year?

The ever optimistic Morgan Stanley team suggest the ASX 200 Index will go to 5750 (today we’re at around 4800) by June next year, while JP Morgan are more “glass half empty” with a forecast of 4600 by December. But interestingly, of all the investment banks, only JP Morgan expect the market to go backwards. This is generally the way. The investment banks almost always forecast a rise in markets, this was the case in 2007 and most other years that preceded a major correction.

So what do we think, I hear you ask?  This is a fairly common question and one that we prefer not to answer. Why? Because the answer you want is very different to the answer you really need.

We truly don’t think our opinion as to the future state of the economy or where the market might be going will be of any value you. Moreover, we doubt that any single person’s perspective on these issues are of value. We say this for the following reasons:

 

  • Firstly, if history is any guide, people (no matter how educated or otherwise) are lousy at making these kinds of predictions about the future.
  • Second, given the plethora of conflicting opinions throughout the financial markets, how can any of us determine which author to believe and which to ignore? It seems you can find an opinion to confirm any prior view, which is typical to how investors make decisions – “this guy agrees with me so I’ll run with his opinion!”
  • And third, studies have shown that the most confident , specific  and detailed forecasts about the future are:
    • most likely to be believed by readers and TV viewers; and
    • least likely to be correct.

 

The reality is that across the spectrum of possible opinions, forecasts and outlooks, someone is going to be correct – but how can you tell if it was the result of repeatable skill or merely random chance?

At Minchin Moore we are resigned to the fact that we do not have the “crystal ball”. Furthermore, we don’t believe anybody else has one that works either. So on this basis, we endeavour to construct our clients’ investment portfolios in an “all weather” format, and we avoid taking bets on short term market movements. As a part of this process, we adhere to some basic academic principles such as these:

 

  • Diversification works (it can reduce risk without reducing expected return).
  • Mean reversion exists (ie following below average returns you typically get periods of above average returns).
  • Momentum exists (ie markets tend to overshoot on the upside and the downside).
  • Regular portfolio rebalancing can reduce risk and increase return.

 

Most “deep” markets “work” (meaning, the competitive forces of well-informed buyers and sellers create a sensible and reasonable price for securities).