Predicting 2016: ’Tis the season to be a fortune-teller. Let me save you some time

Despite their uncertain track record, the experts are lining up to tell us what the year will bring

Hamish McRae
Saturday 05 December 2015 22:14
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The season for making predictions is well and truly upon us
The season for making predictions is well and truly upon us

It is the season for predictions. Every December there is a flurry of forecasts about what might happen in the coming year – forecasts for the world economy, equities and bonds, the oil price, commodities and so on. There are the various official forecasts from national governments, their agencies and their central banks, and from international organisations such as the Organisation for Economic Co-operation and Development, World Bank and International Monetary Fund. And there are the hundreds of private sector ones from banks, consultancies and so on.

Too much information indeed; but clearly there is a market for predictions even if everyone knows that almost all of them have in the past failed to predict the real game-changers for the world economy. They must have a use, even if it is only to set a benchmark against which people can test their own ideas. So what are they saying?

As a general – very general – proposition, the economic predictions are reasonably upbeat, but the market ones rather more circumspect. The best way to get a handle on the economic side of things is data collected by Consensus Forecasts, which polls more than 250 forecasting enterprises. We won’t get the December results till later this week but the November forecast was pretty solid. Growth overall next year would be 2.9 per cent, up from this year’s 2.6 per cent, with the United States at 2.6 per cent, Japan 1.3 per cent, Germany 1.8 per cent, France 1.5 per cent and the UK 2.4 per cent. No one is forecasting recession for any of the big economies, even Japan.

Forecasts for inflation are for a return to more normal times, with the consensus expecting consumer prices to rise from near zero this year in the US, UK and eurozone to 1.7 per cent, 1.3 per cent and 1.1 per cent respectively. Looking further ahead, the outlook over the next 10 years is for inflation to average 2.2 per cent in the US, 2 per cent in the UK and 1.7 per cent in Germany. If that is right, investors in the US and UK would just about break even if they bought 10-year bonds now, but would lose more than 1 per cent a year if they were to buy German ones.

This highlights the illogicality of anyone buying bonds at current yields, particularly eurozone or Japanese ones. Worst of all are Swiss and Swedish bonds, both of which have a prospective negative real yield of 1.2 per cent. Why buy something that, if you believe the consensus, you will lose money on? Better, surely, to remain liquid, even if cash earns next to nothing, and wait for a better opportunity to turn up. The only rational explanations would be that there is some regulatory or legal requirement to hold bonds, or you don’t believe the consensus on inflation, or you think something pretty dreadful may well happen and bonds will be a safe haven as and when it does.

Maybe it is this illogicality that is unsettling fund managers and their advisers. Equity values are stretched. Bond prospects are dreadful. Interest rates will climb, first in the US, eventually everywhere – the only debate being about the timing and speed of the uplift. So what are they thinking?

It is harder to get a handle on market predictions than on economic ones. The various investment banks have targets for indices, favoured “buy” recommendations, and a few big negative warnings. But these views are too disparate to be boiled down. So, instead, here is a sketch of two commentaries that seem to me to catch the mood, from Goldman Sachs and UBS.

Goldman’s view is shaped by the expectation that the US economy will start hitting full capacity sooner than others expect, and that will mean that monetary policy tightens faster than expected. If that is right, the dollar will do well (up 20 per cent overall by the end of 2017), while the 10-year US bond yield will rise to 3 per cent by the end of 2016. The euro and bonds in general are a big “sell”. Goldman is cautious about US equities (up a bit), thinks oil will fall in the short-run but recover, and that commodities are not that bad a prospect.

UBS has a broadly similar outlook, differing in tone more than substance. Things that will rise include equities, US interest rates and oil, while those that will go down include government bonds and eurozone interest rates. It is, however, less bullish on the dollar. UBS has also done a separate long-term study, looking towards 2050. I will give you just one forecast from that. It is that UK shares will produce an average return over the next five-plus years of 8 per cent or more.

I think the big message in all this is that if the world economy grows as expected, then more normal investment conditions will return. Savers will be rewarded; well-run companies will do well; countries whose economies grow will share the fruits of that growth. If that sounds Panglossian, well, we’re nearing Christmas.

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