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]).