Review of 2015 surprises
“Humans don't want accuracy; they want reassurance. The Nobel laureate and retired Stanford University economist Kenneth Arrow did a tour of duty as a weather forecaster for the US Air Force during World War II. Ordered to evaluate mathematical models for predicting the weather one month ahead, he found that they were worthless. Informed of that, his superiors sent back another order: ‘The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.'”
- Jason Zweig, “Lessons from a year of market surprises”, Wall Street Journal, December 30, 2014
In January of last year 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. Let's go back and take a look at how these surprises panned out:
1 Curb your enthusiasm. It's still early and official numbers are not in but it does look like the economy in Bermuda will put in a positive year. I suggested that the “Bermuda economy waffles around zero and GDP remains flat in 2015” but it looks like we will see minor growth this year with two quarters so far reported of 1.8 per cent. Nothing to get “enthusiastic” about but not flat either. Curiously, the job market didn't improve with the 2015 Labour Force survey suggesting there were 37 fewer people working in 2015.
2 Monopolies don't trade at under 20 per cent of book value? I suggested Ascendant had a great deal of bad news baked in at the start of the year. It was a monopoly trading at a fraction of book value. The market disagreed and the shares returned minus 5.6 per cent. The shares now trade at 22 per cent of book value.
3 Digicel/BTC Buys World on Wireless (“WOW”). I suggested the telecom space would continue to consolidate and felt this would be a quick way for Digicel to buy TV rights and offer the triple play. Instead KeyTech was the one acquired by ATN. So, consolidation happened with the full combination of CellOne and Cablevison but not the merger that I predicted.
4 The Federal Reserve Blinks. I suggested that the “Fed continues to make noises about ‘normalising' monetary policy, but ends up doing virtually nothing. At most, there is a single 0.25 per cent rate hike for 2015.” This was correct as inflation was virtually non-existent and growth never really accelerated.
5. Yields fail to rise ... again. I suggested that the yield curve would flatten. The two-year and ten-year flattener trade netted a 1 per cent return. Not stellar but correct. This was a very small move in flattening but nonetheless the right call, directionally.
6. Gold glitters. I said the surprise would be that gold rallied with “declining confidence in central banking (and currency wars) and rising concern about various geopolitical ‘tail risks'.” Although we did have our share of terrorist strikes and emerging market turmoil, there was no bid to the gold market. Gold slid 10 per cent. The take away from this is that gold is not the automatic safe haven that many would have you believe and usually moves in the opposite direction of the US dollar.
7. The S&P 500 underperforms. I suggested multiple headwinds would prevent gains anywhere near the 8-10 per cent suggested by analysts at the time. I suggested one avoid the S&P 500. The S&P on a price basis ended the year down 0.7 per cent. Reinvesting dividends would have netted you a small return.
8. What was real bad becomes good. Only half of this call was correct. I had predicted we would see a bounce in Greece and Russia which were two of the worst markets in 2014. I correctly suggested that Greece would not leave the EU in 2015 and that Russia and Ukraine relations would simmer down with a tentative peace. However only the Russian stock market bounced, gaining only about 4 per cent. Greece's stock market, however, deteriorated further and tanked an additional 40 per cent.
9. Greenback gives some back. At the time “traders were more bullish toward the dollar than any time since the peak of the tech bubble in the late 1990s”. Thus the surprise would be a counter-trend rally. This was not the case as the dollar rallied about 9 per cent based on the dollar spot index. The trend was your friend here.
10. Short Canadian banks. I wrote: “Too many analysts spend their time discussing the trees, when really they should step back and evaluate the state of the forest when it has begun to burn. Looking at the Canadian forest, things are not really great. Commodity prices are collapsing, global economic growth is lacklustre, interest rates are falling, the yield curve is flattening, the loonie is getting smoked, the housing market is overstretched, the Canadian consumer has more debt today than the average American had before the 2008 credit crisis. To top it off analysts have insanely lofty expectations regarding the banks' earnings.” This panned out. The equal weighted Canadian bank index fell 21 per cent.
11. Alternatives outperform. I offered that “rising volatility and intra-asset class dispersion leads to opportunities for active managers and alternative stewards of capital.” This definitely was not the case. In fact some rock stars of the hedge fund world like Ackman and Einhorn were absolutely devastated in 2015 — both lost about 20 per cent for the year. Private-equity public stocks also got hammered, falling much more than the market as well with a host of concerns ranging from credit fund issues to closures of their own hedge funds. In fact, it was a very difficult year again for active managers as literally only a handful of large stocks had reasonable gains.
12. European energy. Everyone hated the euro and everyone hated energy at the end of 2014. It turns out that the consensus was right. The market never bid up this sector as crude continued to fall. European energy shares continued to sink an additional 7 per cent for 2015.
The last year was not full of major surprises when one considers consensus at the beginning of the year. Major macroeconomic trends simply persisted throughout the year. Thus it's not really a surprise that many of my surprises did not pan out. This was the lowest hit rate over the few years that I've been doing this, only 40 per cent, versus 75 per cent in 2014, 70 per cent in 2013, 75 per cent in 2012. The trend was your friend in 2015.
In the next couple weeks I hope to have my surprises out for 2016.
Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd and can be reached at firstname.lastname@example.org.
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