Citizens' Issues
Predictions—don’t bet on them

The mistakes in forecasts do seem to follow a pattern. They all find rationalizations for a continuation of what has gone before and attempt to repeat it. Not the best idea

It is often traditional for commentators at the end of the year to make predictions about the coming year. Since I was not born with the gift of prophecy and cannot see the future, I started a new tradition. Rather than make predictions myself, I reviewed the predictions of others throughout the year. Fortunately these are quite plentiful. Over the course of the year I have collected them and compared them with the real results. What is truly interesting to me is that anyone bothers to pay people for these forecasts.

Let us start with commodities, specifically the all time favourite gold. The good people at Capital Economics predicted that gold would reach a new high of $2,500 no later than 2013. Although that is pushing the envelope in terms of time their reasoning was sound. They based their prediction on the assumption that “doubts over the survival of the euro [would] come to a head.” The euro is certainly in doubt and gold did make a run at $2,000 with an annual high of $1,900, but since then it has declined 15% to $1,600 despite continual questions about the euro. So the momentum behind the yellow metal might have finally dissipated.

Another favourite commodity was copper. Barclays Capital predicted that Dr Copper would have an average price of about $9,550 in 2011about the price it started the year. Goldman Sachs was even more optimistic. They predicted a rise in 2011to $11,000 within 12 months a 15% rise. The assumption was logical. Continued recovery in the US and Europe and booming Chinese demand. But there was a flaw. Copper was almost at an all-time high. Nothing stays up forever. Copper did not rise 15% or even stay the same. It declined 20% to $7,500.

Oil is always a popular commodity to predict. Thanks to US and Chinese monetary stimulus it rose from an average of $80 in 2010 to a high of $114 in 2011. However it did not live up to Goldman Sachs’ expectations. They predicted that it would average $110 a barrel. They were only off by 20%. It only averaged $87 a barrel.

Emerging markets were heavily hyped. In 2010 investors ploughed a record $86 billion into emerging market funds. The rational was that “strong economic and micro fundamentals in emerging markets, and fairly steady returns” would equal rising markets. They didn’t. The MSCI Emerging Markets Index fell 20% over the year. The glaring flaw in the argument again was valuations. If the markets poured a record amount into emerging markets in 2010, it is a conspicuous signal that the feat probably would not be repeated. The markets of Chile, Peru, Indonesia, the Philippines, Sri Lanka, Taiwan, and Thailand all reached all-time highs in 2011. There was not where to go but down.

The common denominator to commodities and emerging markets is China. As the world’s second largest economy it has an enormous impact on the world economy. All forecasts are based on assumptions and most assumptions are based on recent history. The Chinese economy has grown by leaps and bounds over the past 10 years, so the logical assumption is that it would continue. At least that’s what two famous money managers thought. Mark Mobius, executive chairman of Templeton Emerging Marketing Group, and Jing Ulrich, chairperson of China equities and commodities at JPMorgan Chase & Co, both forecast that China’s stocks were set for a rebound, because the government could keep inflation under control.

Of course keeping inflation under control is a tall order if you have spent two years emptying your banks to flood your economy with stimulus. In the end, the Chinese government was just about as helpless as other governments and the Shanghai market ended the year at a level not seen since March 2009.

But my all time favourite prediction for the year was an American stock, Netflix. Netflix was supposed to have a paradigm busting business model and no competitors. Of course it wasn’t true. They rent movies and they had lots of competition. Still Goldman Sachs recommended the stock in March when it was at 200. It did go to 300 by 14th July and my forecast for a crash on 31st July was very accurate. It dropped 76% since last summer.

Most disappointed investors blamed Netflix CEO Reed Hasting who certainly made some massive blunders, but the real mistakes were made by the people who recommended the stock and the people who followed their advice. Business models can be hard to analyze and decisions unknown, but all time high prices are something that are screamingly obvious and should be avoided at all costs. 

The mistakes in these forecasts do seem to follow a pattern. They all find rationalizations for a continuation of what has gone before and attempt to repeat it. Not the best idea.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).

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COMMENTS

Govind Shanbhag

5 years ago

Money Life - This is too good article and should be eye opener to those who blindly follow such predictions. Are these so called experts not accountable at least morally. Please keep it up for enlightening us.

Budget to be presented after state polls: FM

The announcement of the assembly election schedule in five states between 30th January and 3rd March has raised the possibility of rescheduling of the Budget for 2012-13 this year

New Delhi: The Union Budget will be presented after the completion of elections in five states, but the government has not yet decided the final date of presentation, reports PTI quoting finance minister Pranab Mukherjee.

“We have not yet decided the time (for the Budget), but naturally it will be after the elections,” Mr Mukherjee told reporters here.

He was replying to a query on the likely date for presentation of the Budget.

The announcement of the assembly election schedule in five states between 30th January and 3rd March has raised the possibility of rescheduling of the Budget for 2012-13 this year.

As per the schedule worked out by the Election Commission, last polling will take place on 3rd March in Goa and counting of votes will begin on 4th March.

The general budget is usually presented on the last day of February every year.

Mr Mukherjee will hold brainstorming sessions with various stakeholders during his annual pre-budget meetings beginning 11th January.

The first meeting would be held with agriculturalists, followed by a series of interactions with sectoral experts, representatives, industry captains and economists over the next ten days to get their feedback and inputs for incorporating them in Budget 2012-13.

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Factory output index at 54.2 in December; highest since June 2011

Commenting on the growth in the manufacturing sector, Leif Eskesen, chief economist for India & ASEAN at HSBC said, “Manufacturing activity rebounded in December led by higher demand from both domestic and foreign clients, suggesting that the momentum in the sector is not quite as weak as official and more dated industrial output data would suggest”

Manufacturing activity posted its best growth in six month at 54.2 in December, as per the HSBC Purchasing Managers’ Index (PMI)—a headline index designed to measure the overall health of the manufacturing sector. The increase was on the back of a rise in new business during December. The index was up from 51 in November.

Reflective of larger new order volumes, Indian manufacturers raised production in December. Output increased solidly, with the rate of growth accelerating since November to a four-month high, the HSBC PMI stated.

Employment in India’s manufacturing sector also increased in December, ending the period of job losses that began in August. However, the rate of employment growth was only slight, with the vast majority of panellists keeping staff headcounts unchanged from November.

However, input costs faced by domestic manufacturers rose further during the latest survey period. Raw materials and petrol were particularly mentioned as having increased in price. Overall, the rate of input cost inflation remained strong and above the long-run series average, despite slowing slightly since November. Firms partly passed on greater cost burdens to clients by raising their output charges in December.

Commenting on the growth in the manufacturing sector, Leif Eskesen, chief economist for India & ASEAN at HSBC said, “Manufacturing activity rebounded in December led by higher demand from both domestic and foreign clients, suggesting that the momentum in the sector is not quite as weak as official and more dated industrial output data would suggest.”

“The rebound added to the build-up in backlogs of work and also stabilized employment, which crawled back into positive territory. The solid demand from clients allowed manufacturing companies to increase output prices at an accelerated pace to pass on rising costs,” he added.

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