Friday, February 8, 2013

Ten Market Estimates and Predictions From 2012 - An Evaluation

Market estimates and predictions are always viewed with a degree of caution. Attempting to forecast the direction of shares, currencies and interest rates is very difficult to do, especially with any accuracy or consistency. However, some crystal ball gazing can be a necessary exercise for investment advisers and strategists, and it does at least allow us to focus our thoughts, consider various scenarios and evaluate risks and opportunities. Rather than rely too heavily on market predictions, we prefer to consider them as talking points that might encourage some insightful debate and thought.

On that note, let's recap and evaluate what we wrote a year ago regarding 2012.

1. Recession in Europe, while the US economy surprises us

Correct. Europe did fall back into recession despite most forecasters expecting at least some growth, while the US economy was much more resilient than many predicted as house prices stabilised and consumers began to spend again. Many of the worst problems in the United States over 2012 were political, rather than economic.

2. No break-up of the Eurozone in 2012

Correct. The Greek election was a bit of a debacle, but in the end the Eurozone stuck together and the European Central Bank resolved to do "whatever it takes" to keep things stable. For now, it's working.

3. No "hard landing" for China

Correct, but only half a point. China did avoid a hard landing (which would have had severe consequences for Australia and to a lesser extent, New Zealand) but we also said it would hit 8% growth. It looks to have just missed this hurdle, with actual growth for the year likely to be in the high sevens.

4. Shares have a positive year

Correct, but only half a point, because we weren't nearly optimistic enough. We picked the local market to deliver "at least 5%" and the US to rise 10%, but share investors have had an outstanding year with the NZX50 up 24.2% and the US rising 15.9%.

5. NZ Interest rates remain very low

Correct. A year ago the bank economists were, on average, expecting the Official Cash Rate (OCR) to hit 3.0% by the end of 2012, but it was unmoved all year at its current 2.5% as the recovery remained very sluggish.

6. The NZ dollar rises against our major trading partners

Correct. The NZ dollar rose 6.6% against the US dollar as the Americans continued to undermine their currency with their money printing policies. It also rose against the British Pound, the Euro and the Australian dollar.

7. Fixed interest doesn't repeat its 2011 performance

Correct. Fixed interest was the star asset class of 2011, delivering a stunning 13.3% compared with NZ shares, which fell 1.0%. But in 2012, shares had their best year since 2004 rising almost 25%, while fixed interest delivered a reliable yet much less inspiring 6.2%.

8. Obama is re-elected US president

Correct. It was a tight race and Mitt Romney put up a good fight, but the eventual election result meant an unchanged US political landscape. Ironically, rather than the usual post-election optimism, markets saw the status quo outcome as a major negative. The expectation of further political gridlock and further decision-making stalemates drove the S&P500 down 5% in the days immediately following the election.

9. Mighty River Power might not be the only game in town, as legislative changes might enable Fonterra to introduce share trading allowing the public to invest

Correct. A final decision on Mighty River was deferred into 2013 and Fonterra did indeed come to market (in the form of the Fonterra Shareholders Fund), and what a stunning debut it was.

10. Inflation falls back to low levels

Correct. Official inflation was just 0.8% - below the Reserve Bank's target band of 1-3% and unlikely to spark any interest rate rises in a hurry.

That's nine out of 10 for 2012, which is a great result during what was another difficult year to navigate, despite the good returns we saw in the end. Following this stellar performance, how will the market perform in 2013 and what sort of themes should investors be thinking about? See my next article 10 predictions for the year ahead.

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