How did 2017’s predicted surprises turn out?
“The bottom line remains: forecasts and predictions are exercises in marketing. Outrageous and wrong forecasts are typically forgotten, and when one randomly happens to come true, the guru is lauded as the next Nostradamus” — Barry Ritholtz, Bloomberg View columnist, December 17, 2016
In January 2017, I laid out 12 unexpected events or surprise situations that were, at the time, outside of the conventional consensus opinion that I felt had a reasonable chance of occurring. Remember that I personally believe forecasting is absolute rubbish in general, but to keep me honest, let’s go back and take a look at how these surprises panned out:
1. Bermuda Insurance/Reinsurance M&A Continues: I suggested that mergers and acquisitions would continue. According to Willis Re’s report Extreme Weather — Calm Market, merger and acquisition transaction volume in the global insurance sector finished 2017 on a par with 2016’s $49 billion.
From a quick merger and acquisition screen run on Bloomberg you’ll find eight deals completed in 2017 that involved a Bermuda target or acquirers. Most actually involved the sale of various units from Bermuda entities. There were, however, no major deals involving two local companies combining unless you count the closing of the Fairfax/Allied deal and the Endurance/Sompo deal announced in 2016.
I still suspect that any insurance company with a market cap of $5 billion or less remains in play as a potential acquisition or merger candidate. Since rate increases for the January renewals appear to be lower than hoped for despite record insured losses during 2017, it is likely we will continue to see increased focus by insurers to improve profitability and efficiency in 2018.
2. Bermuda’s Economy Accelerates. With the America’s Cup and a surge in tourism the surprise was for the GDP to come in at 3 per cent or better. The verdict is not in on this and we only have the first quarter of GDP, but I suspect this will be a great year GDP-wise. Our estimate is for nominal GDP to come in at about 4 per cent for 2017.
3. Gold Glitters. After a five-year bear market I suggested gold would finally rally and hit $1,400 an ounce at some point. According to Bloomberg, even though we saw a surge in equities, investors still sought out gold as a haven, pushing Comex futures volume to a record in 2017. Gold’s appeal did not, however, push its price to $1,400. It topped out at $1,357 and finished the year up 13.7 per cent.
4. Trump Triumph Trade Withers. The surprise was for the S&P to have a negative year as profit margins compressed along with multiples. The total opposite actually happened. The S&P 500 multiples actually expanded, credit spreads compressed and the dollar weakened yielding huge gains for equities.
5. FANGs Fly (Again). The surprise was for continued double digit gains for the FANG stocks: (Facebook, Alphabet, Netflix and Amazon.) Soar they did: Facebook, Netflix and Amazon posted returns greater than 50 per cent while Alphabet rose over 30 per cent. It would appear that these dominant players continue to dominate … at least for now.
6. Active Management Wins. This refereed to: “Surprisingly, after years of underperformance and the constant drum beat that active management is dead, the average hedge fund outperforms the market. Shrinking correlations among stocks, limited central bank intervention and more volatility play into more discerning strategies.” Nope. Volatility was non-existent in 2017 — in fact it may be the least volatile year on record. The Hedge Fund Research HFRX Global Hedge Fund Index was up “only” 6 per cent in 2017. Passive investing flows continue to flood markets and are almost assuredly effecting the composition of returns.
7. Biotechs Boom. The surprise was for biotech companies to post market-beating returns despite Trump’s tweeting bombs against high drug prices. They did. The SPDR S&P Biotech ETF posted a 43 per cent return for 2017.
8. Europe Holds Hands. The surprise was for no populist party to win an election in Europe and as a result the risk aversion would dissipate — leading to a surge in the euro and outperformance of euro-area stocks. The STOXX Europe 600 posted gains of about 23 per cent — beating the S&P 500’s gain of 19 per cent. The euro was the top G10 currency for the year — posting a 13.7 per cent total return.
9. Trump Reflation Trade Stalls. Hope was high at the start of 2017 for a rapid adoption of many pro-growth policies. The surprise was that the “political process delays the actual effect and the benefits won’t really be felt till 2018 … US GDP for 2017 misses the goal of ‘3 per cent plus’ for 2017 and in fact comes in less than 2.5 per cent.” Current estimates are for US GDP to come in at 2.3 per cent for 2017.
10. Cobalt Surges. The surprise was for cobalt to rally on rising lithium battery production along with the increasing production of jet engines. The thought being that cobalt demand would grow and cobalt spot prices surge in price. The London Metal Exchange Cobalt Spot price exploded in 2017 — up about 130 per cent for the year.
11. Snapchat IPO Disappoints. Snap’s IPO was much anticipated and hyped. The stock, however, had an abysmal year — the stock finished the year down 40 per cent.
12. Bond Yields Remain Little Changed. I suggested despite Fed rate hikes and the chance for a stronger dollar, the US ten-year Treasury security ends the year near where it began.
In fact, the yield on the ten-year US government bonds ended the year at 2.41 per cent, or four basis points lower than at the start of the year. Additionally, the US government bond market traded in a relatively narrow range with ultra-low volatility all year. The ten-year spent around 80 per cent of the time in a band of just 30 basis points.
I obviously missed a number of big financial surprises for the year such as a weaker dollar, record catastrophic storms, and the rise of crypto currencies.
In the next couple weeks I hope to have my surprises out for 2018.
Full disclosure: Facebook and Alphabet are owned by the author and clients of Anchor Investment Management Ltd. at time of writing.
Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd. and the views expressed are his own. Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisers prior to any investment decision. Index performance is shown for illustrative purposes only. You cannot invest directly in an index