How did those 2016 surprises pan 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 of last year I laid out twelve 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. Sunny with a Chance of Showers. I suggested that Bermuda’s economy downshifts but remains positive for the year.
Official statistics are not out for the year yet, but this does appear to be the case for 2016. I also added that it may come in weaker than 2015 as retail sales slow slightly with “a number of months roll over to the negative side”.
So far, May and October have reported negative year-over-year numbers. I also believed “at least one additional merger or acquisition in the reinsurance space continues the trend of consolidation.” There were actually a number of deals — Fairfax with Allied World, Argo with Ariel, and Sompo with Endurance.
It was also noted that the “nation begins a serious conversation on a ‘living wage’ as inequality concerns escalate.” In this case parliament actually formed a joint select committee to investigate the issue of establishing a living wage.
2. BSX Bounce. I anticipated a bullish run for BSX equities: “The recent Butterfield acquisition of HSBC assets bolsters earnings. Discussion begins on an alternative exchange listing as Carlyle prepares its final exit. Belco gets a favourable regulated rate ruling which helps to alleviate profitability concerns.” All these aspects materialised. The total return for the BSX was over 50 per cent with Ascendant up about 48 per cent.
3. Leap Frogging Unicorns. This surprise suggested that many unicorns (private companies valued in excess of $1 billion) were overvalued and would need to be revalued.
I noted that “IPOs will simply not be able to be priced at venture capital funding levels and valuations will plummet.”
In June of 2016, Rett Wallace, co-founder at Triton, was quoted in a Financial Times article titled “Unicorns face tough road to Wall Street” as saying “Promising growth companies that don’t go public attract capital from private sources in larger amounts and at growing valuations, making an eventual IPO or trade sale more challenging”. In the same article it is noted that “in aggregate, for tech start-ups that listed from 2013 to 2015 valuations have shrunk by more than a third from the IPO and about half from the first trade or coveted first day ‘pop’”.
4. The Federal Reserve Reconsiders. I basically didn’t believe the Federal Reserve at the start of 2016 nor the market’s initial rate projections. Thus I said: “The Fed continues to make noises about ‘normalising’ monetary policy, but ends up doing virtually nothing again in 2016. At most, there is a single 0.25 per cent rate hike for 2016.” The Fed only raised once and only in December.
5. Sovereign Debt Yields Remain Low. I was calling for a continued environment of low global yields: “US Treasury yields defy the majority view again which suggests they rise. More specifically, the yield-curve flattens even after considering a much more muted Federal Reserve hiking cycle. The downshift in global growth will likely curb investment and thus expand global savings. In fact global growth could surprise to the downside and fall below 3% for 2016.”
This all was working until November 8 … then Trump arrived. The post-election sell off in bond market quickly reversed much of the gains seen in the year. To track this I used the iShares 20+ Year Treasury ETF (Ticker: TLT). At one point it was up about 20 per cent for the year but actually ended down in price.
6. Democratic Sweep. Donald Trump’s surprise victory and the Republican sweep negated this dramatically. In retrospect this was actually THE big surprise for 2016 and left many pollsters and prognosticators baffled.
7. US Stocks End Negative. I suggested: “Strategists estimate the S&P 500 will end up above 2,300 or about 12 per cent for 2016. However, high multiples, peak profit margins and weak earnings growth on the back of soft pricing power causes a sell-off in US equities.”
To track this I was looking at the shorted return of the Nasdaq 100 Index (Ticker: QQQ). The QQQ was negative for the first half of the year, approached a zero return to the beginning of November then … the Trump Triumph rally took over.
8. Bricks Over Clicks. I was looking for a reversal in fortune on this. I stated: “Despite Amazon’s impressive growth and clear dominance in the online space, its nosebleed valuation drags down its return for the year. Traditional brick retailers who have been devastated in 2015 regain relative performance on the back of footprint rationalisation, private equity bids, activist investors and depressed valuations.” To track this I suggested long a “Bricks Basket” of Nordstrom (Ticker: JWN), Macy’s (M), and Wal-Mart (WMT) while selling the “Clicks Basket” of Amazon (AMZN), eBay (EBAY) and Overstock (OSTK). This never materialised. OSTK actually soared over 40 per cent, likely on the back of its blockchain initiatives. The traditional “brick” retailer posted anaemic gains in total.
9. Dollar Dithers. At the start of 2016 one of the most crowded trades was being long the US dollar. I suggested a basket currency to fade this almost one-sided view of the following: long euro, yen, and short Korean won, Malaysian Ringgit and Chinese yuan. Trade the pound short into the referendum.” This resulted in a gain of about 4 per cent on the basket for the year and at one point, before the Trump victory, was way in the money.
10. No More Cheap Eats. After a tough year I thought there might be a surprise rebound in agricultural prices. Although, as measured by the Rogers International Commodity Index — Agriculture (RJA), agricultural commodities did end up in the green, I would not say they outperformed. Base metals and energy appear to be the bigger winners in 2016 on the commodity front.
11. Value Over Growth. I believed the surprise would be a reversal of trend: “This may be the year of mean-reversion as “story stocks” underperform more stable businesses with lower valuations.” In measuring this, the iShares Russell 2000 Value ETF (IWN) rallied about 30 per cent in 2016 versus the iShares Russell 2000 Growth ETF (IWO) gain of about 10 per cent.
12. Opec Turmoil. I was more bullish on crude’s eventual recovery: “Crude collapses under the weight of huge supply initially but then turns. Plunging oil prices cause social unrest in Opec nations. Cut backs in fuel subsidies and other social welfare programmes lead to revolt among the populace. Venezuela becomes unhinged. Geopolitical tensions rise throughout 2016 and a risk premium reasserts itself. Saudi Arabia throws in the towel and “suggests” they will cut production. Multiple bankruptcies in the oil patch help to rapidly reduce the supply balance. Crude ends the year in positive territory even after plunging 30% initially.”
A great deal of this actually materialised. I suggested to “sell WTI crude to near $25 then go long.” WTI ended up over 40 per cent for the year.
The Trump victory and Republican sweep in November reversed a number of surprises that were actually coming to fruition through the year.
Again, this was the ultimate surprise for the year and in retrospect if you got this right and ignored what pundits believed the stock market would do upon his victory, you would have minted some impressive surprise gains.
The hit rate of about 60 per cent is up from the 40 per cent of last year and nearer to that of 75 per cent in 2014, 70 per cent in 2013, and 75 per cent in 2012.
In the next couple of weeks I hope to have my surprises out for 2017.
“Unicorns face tough road to Wall St: With a pileup of tech companies in the private funding market and public deals losing value, what will become of all the unicorns?” - Financial Times, June 21, 2016
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.