Cracks in the Crystal Ball
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As Australia heads into a new financial year, the media tends to be full of advice for investors on what the coming 12 months will bring. But before acting on the speculation it might be wise to look back on how last year’s forecasts panned out.
Going back to the end of the 2017/2018, a media theme was that an end to the Reserve Bank of Australia’s then two-year freeze on interest rates was in sight. A survey of economists put the chance of a rate rise in the coming 12 months as an even money bet*. In fact, 23 out of 26 economists expected rates to have risen by the middle of this year.
They got the end-of-the-freeze bit right. The RBA did change the cash rate a year later, in June 2019. But the move was down, not up. And it followed that up a month later with another one.
On the Australian dollar, the same panel of economists expected the currency to end the financial year at 74 US cents. The currency in fact spent most of the year in continuous decline, ending around 69 US cents, a level that only one of the 26 economists predicted.
For the Australian share market, the average forecast was for the S&P/ASX 200 index to be essentially unchanged in the financial year. As it turned out, the index rose just under 7% over the year in price terms. In total return terms, it gained more than 11% and ended the year just 2% below the record highs it struck in October 2007.
So, in summary, a panel of Australia’s leading economists in their projection for the 2018/19 financial year predicted cash rates to go up. Cash rates in fact went down. They forecast the local currency to be unchanged. It fell by about 7%. They forecast the local share market to be flat over the year. It returned more than 11%, including dividends and was close to record highs.
Now, 12 months later, we are seeing a new round of forecasts for the year ahead. To be sure, there is plenty of uncertainty out there. Alongside ongoing trade tensions between the US and China, there are Britain’s struggles with Brexit ahead of an October 31 deadline for a deal, record low government bond yields and sluggish income growth in many countries.
But if you went back to the end of 2017/18, there was plenty of uncertainty as well. The trade spat with China was a story back then, too. China’s benchmark stock index in Shanghai had fallen 20% in just five months. In Australia, tighter borrowing costs in the wholesale market had forced some banks to raise their home mortgage rates.
The fact is markets are always confronting uncertainty in one form or another. As we’ve seen, forecasting financial markets with consistent accuracy, even for the experts, is extremely difficult and not something that is likely to form the basis of a sound investment strategy.
So, that suggests taking media speculation about the coming year with a pinch of salt. Instead, you could focus on your own goals and how you are tracking toward them. This involves focusing on those elements within your control, like how you allocate your investments across different assets like stocks, bonds, property and cash, the degree of diversification in your portfolio, and the fees and taxes you pay.
How much risk you take needs to be decided in consultation with a financial advisor who knows you and your family, your risk appetites, circumstances and goals. From there, it comes down to exercising discipline and periodically rebalancing to ensure you remain on track.
Of course, everyone is entitled to their opinions about what might happen in the markets in the coming year and beyond. But we have seen that even the people whose job it is to make forecasts about markets struggle to get it right.
Fortunately, you don’t need to be an expert or try to outguess prices to benefit from the opportunities that markets present. That’s because markets do a pretty good job of incorporating all the information you read about in the news every day. Being globally diversified and spreading your risk can help reduce the volatility you might experience otherwise by betting on individual countries, stocks or sectors. That in turn can help you remain on track and make the news less worrisome.
You don’t need a crystal ball after all.
*‘Rate Rise an Even Money Bet’, Sydney Morning Herald, June 29, 2018
Jim Parker, Vice President DFA Australia Limited
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