The start of a new financial year sees media outlets seeking forecasts from economists and other financial experts. In the following piece, Jim Parker, Vice President of Dimensional Fund Advisors, takes an interesting look back at the forecasts made 12 months ago to see how close the experts were to the end outcome.
Many Happy Returns
As a new financial year gets underway in Australia, the media tends to be full of outlooks about what investors can expect for the coming 12 months. These pieces are often entertaining to read, but can be even more so a year later.
Given Australians’ large exposure to the housing market, a perennial talking point in the business pages is the outlook for official interest rates. And market economists employed by financial institutions are always ready with an opinion.
Fairfax Media in early July last year featured a survey of 26 economists about their expectations for interest rates, alongside their forecasts for the Aussie dollar, shares and the economy generally in the 2017/18 financial year. (1)
Of the sample, five predicted the Reserve Bank of Australia would cut rates, another five expected an increasein rates and the remaining 16 expected no change. As it turned out, cash rates remained at 1.5% throughout the financial year.
The panel of economists also warned that Australia faced a one-in-five chance of falling into recession, most likely due to a sharp fall in domestic property prices or a weakening in the Chinese economy.
As it turned out, the Australian economy accelerated through the year, with investment rising, commodity prices boosting incomes and employment growing strongly, according to the RBA’s most recent policy announcement. (2)
Economists on average forecast the Australian dollar to fall from 77 US cents to 72 US cents over the year. What transpired was that the currency moved in an eight-cent range between 73-81 cents before ending 2017-18 at 74 US cents.
Where the economists really came unstuck, though, was on the share market. For the S&P/ASX-200 index, the consensus forecast was a meagre rise for the year of less than 2%. The most pessimistic respondent foresaw a slide of 12%.
But the Australian share market in fact gained 8% in price terms for 2017/18 or about 13% on a total return basis. This represented the most optimistic individual forecast from the panel of economists and came despite weakness in traditional market leaders like Telstra and the major banks.
Offsetting the weakness in those sectors were big gains in areas like energy, materials, consumer staples, healthcare and information technology. Individual strong performers included Santos, BHP Billiton, CSL and Flight Centre.
While the panel also had doubts about the global market outlook, there were double-digit returns in major overseas developed markets, including the US, the UK and Japan. The MSCI World-ex Australia index rose more than 15% over the year.
It’s a tough business being a market forecaster and, to be fair, economists polled by the media tend to add a lot of qualifications to their baseline assumptions.
But it just goes to show that basing your investment strategy on what the gurus expect probably isn’t going to be a sustainable approach. Sometimes they get it right. More often they get it wrong. And the ones who do pick the market movement tend to change from year to year. Who are you going to back? A better strategy is to build a diversified portfolio with exposure to many countries, sectors and stocks. Add an exposure to bonds, listed property and cash – and you are providing a cushion for the inevitable bumps along the way.
Finally, exercise discipline and change your allocation according to what’s going on in your life, not what’s being projected in the news pages.
Many happy financial year returns!
(1) ‘The Year of Muddling Through’, Economic Survey, Fairfax Media, 1 July, 2017
(2) Statement by the Governor, Reserve Bank of Australia, 3 July, 2018