The folly of forecasting: projections vs reality

Posted 15 January 2024 by Scott Henderson

The start of a new year brings with it many things: resolutions, gym memberships (whose cost per visit increases as the year goes on) bitterly cold weather… the list goes on.

Within our profession, something that cannot be avoided is the multitude of asset class or stock predictions for the upcoming year from asset managers and brokers alike, often backed by sound economic rationale for why an investment category, or individual holding, is set for a stellar year.

We all know that these forecasts, even with what appears to be sound rationale, can be thrown off by unforeseen events such as global pandemics, wars, trade wars and currency movements, and yet they persist.

Instead of giving you another 2024 prediction to trawl through, we’re going to cast our eyes back to some historic predictions from various sources* to find out exactly what happened.

2018 – Emerging Markets (EM)

Following a year of strong performance in 2017, one global house indicated that EM remained attractive going into 2018. There were a multitude of reasons offered, such as a stronger economic growth outlook than developed markets (particularly from the smaller emerging market economies), room for supportive monetary policy in select EM countries, and Latin American elections expected to shape economic policy. One note of caution in the outlook was around currency stability, as emerging markets are heavily influenced by currency movements and particularly the strength of the US Dollar. Well, a year of Dollar strength, coupled with a US-China trade war and rising US interest rates (which EM countries often borrow in) contributed to EM returns being some of the weakest of the year, with the MSCI EM Index returning -14.6%**.

2020 – Real Estate Investment Trusts (REITs)

One article highlighted REITs as an attractive asset class going into 2020. The rationale behind this being a continued low interest rate environment, resilient economic activity and healthy job market, with the author also highlighting the diversification properties REITs offer. What this predictor could not have foreseen was the global Coronavirus pandemic that emerged in 2020, leading to lockdown restrictions across the globe from March 2020. Clearly, as non-essential ‘in person’ activity all but ceased for a number of months, REITs, that often rely on footfall to maintain operations of the underlying business (i.e. retail), were impacted significantly. As a result, Global REITs returned -10.4%*** and were the worst performing asset class in 2020.

2023 – US equities

After falling 20% in 2022, one house continued to be negative on equities, particularly the US, believing that an ever-looming recession would present tough macroeconomic conditions. This combined with rising costs would lead to a drop in corporate earnings and subsequently company share prices, presenting a good entry point. If one had waited for the S&P 500 to fall to a level below that at which it started the year, then they would still be waiting, as the index went on to provide a strong return. Despite a banking crisis in March 2023, initiated by Silicon Valley Bank, the S&P 500 rose over the year, led by technology stocks who received a boost from expectations of rate cuts in 2024 and progress on the development of artificial intelligence.

In summary

Don’t get us wrong, we find outlook pieces and forecasts useful in formulating thoughts around asset allocation and tactical positioning. But the moral of the story here is to maintain a diversified approach within a portfolio and to not turn over your portfolio’s strategic asset allocation as a result of one outlook piece.

Instead of ‘New year, new portfolio’, it’s more ‘New year, same portfolio with new ideas and areas of focus’. Not quite the same ring to it, but you get the gist.

* These have been anonymised to save the blushes of the authors

** Source: MSCI Emerging Markets Index Factsheet. Total Return in USD.

*** Source: FTSE EPRA Nareit Global REITs Index Factsheet. Total Return in USD.

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Scott Henderson

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Scott Henderson