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Time to revisit the ‘12 surprises for 2018’

Taking stock: there were two market corrections in 2018, when stocks dropped by more than 10 per cent, and then rose again. Nathan Kowalski predicted such a correction for the S&P 500, but his belief that it would also eclipse 3,000 points did not materialise after it peaked at 2,940 (File photograph)

“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 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 fact, anyone that ardently and inflexibly uses any form of forecasting for investment decisions needs to reconsider their investment process. Let’s go back and look at how these surprises panned out:

1. Value Beats Growth. I suggested that after a run of seven out of ten years where growth beat value, 2018 was the year for value to shine. Nope. Although both the MSCI World Value Index and the MSCI World Growth Index finished in the red for the year, growth beat value by nearly 4 per cent. I suspect that value as defined by the MSCI indices will likely have its time in the sun this year. The reason why value investing works, is because it doesn’t work — because it goes out of favour for extended periods it eventually becomes very attractively priced.

Score: 0/12

2. Transformational Deal. The thinking here was that the evolution of the technology platform company would continue to scale. This was not the case in 2018. Google, Apple and Amazon did not do any of the transformational deals mentioned. Amazon did set up a joint venture on healthcare with JP Morgan and Berkshire Hathaway, but no other major tie ups developed. I still think Apple buying Netflix could be value accretive and Amazon is very likely to buy a mid-tier bricks and mortar retailer and transportation company.

Score: 0/12

3. Commodities Crush It. Although commodities did not exceed returns of the equity market, the commodity called out in the surprise, uranium, did crush the market. Uranium returned more than 20 per cent on the year as cuts in Canada and Kazakhstan brought the situation into structural undersupply. There is a good chance that uranium-related investments continue to perform well.

Score: 1/12

4. Gene Therapy Explodes. The surprise was the further rapid development and acceptance of genomics. Several developments progressed in 2018 including the further development of CRISPR enzymes, potential blood transfusion genomic sequencing and even a genomic solution to HIV. As an example, CRISPR Therapeutics handily outperformed in 2018 — soaring over 20 per cent.

Score: 2/12

5. Despite 10 per cent correction at some point, the S&P 500 “melts up”. I suggested that volatility would return. We had two corrections in 2018 greater than 10 per cent and two “melt ups” — the first in January and then another heading into August. I had indicated that the “S&P 500 will eclipse 3,000 at some point in 2018 (average Wall Street target price for the S&P 500 is about 2,800).” It only reached a high of 2,940 in September.

Score: 2.5/12

6. Main Street lags Wall Street. This refered to: “Despite robust employment numbers and an improving global economy, wage gains are not significant. Discussion among academics and the Federal Reserve circles around the Philips Curve and its failure to predict higher wages. Likely causes appear to be technological acceleration in artificial intelligence and other forms of automation which essentially begin the major computerisation of a huge set of tasks across a wide swath of professions.” Although there are various ways to slice the data on this, we will consider the US Real Average Hourly Earnings rate which looks like it will be up around 1 per cent. Now, this is not a huge expansion per se, but the worker would have come out ahead compared to Wall Street which saw the equity markets globally slide.

Score: 2.5/12

7. Crypto Currencies Crash. Boy did they ever. We can look back now and pretty much use the euphoria around this as another bubble example. For instance, Bitcoin collapsed over 70 per cent and the Bloomberg Galaxy Crypto Index fell around 80 per cent. It is safe to say that human nature doesn’t change.

Score: 3.5/12

8. South Africa is super. Absolutely not. Despite being one of the cheapest markets on a cyclically adjusted price earnings ratio at the start of 2018, the market got about 25 per cent “cheaper”. Political turmoil and the strength in the US dollar lead to a collapse in the rand.

Score: 3.5/12

9. The Bond Bull Market Ends. I forecasted that “the ten-year US Treasury security breaches 3.25 per cent at some point. (Note: only about 10 per cent of estimates I can see on Bloomberg estimate yield ending above 3.25 per cent). Asset allocation is turned upside down and bonds “appear riskier” than stocks as credit spreads also widen and pull down even higher quality bonds”. All this developed in 2018. The US ten-year printed 3.259 per cent in October and investment grade bonds posted a rare negative return for the year.

Score: 4.5/12

10. Bermuda Stumbles. Although official figures have not come out, we do have Q1 GDP which was negative. I think the trend indicated in the retail sales numbers and freight volumes points to deceleration in 2018. Real GDP could fall 1.5 per cent in 2018 and we may have a “technical recession”. If we see additional regulation, taxes and likely consolidation in the insurance market, 2019 will be a challenging year as well.

Score: 5.5/12

11. Populism Loses and Wins. May was not replaced by Jeremy Corbyn but the Democrats did lose Senate seats in 2018. Populism continues to grow globally, and this will be a recurring theme for 2019. One of my greatest fears is further advancement of socialist and nationalistic agendas — both would not be considered “market friendly”.

Score: 6/12

12. Dollar Drops. The dollar performed much in line with consensus — rallying strongly in 2018. Only the Yen posted a gain on the dollar for the year.

Score: 6/12

I obviously missed several big financial surprises for the year such as the collapse in the equity market in December, the trade tariff escalation, and marijuana madness. The hit rate of 50 per cent is sharply down from the 75 per cent last year and far below the most common 75 per cent score. This is a good thing and it would be even better had the score been weaker — forecasting doesn’t pay. In investing, predictions are not important — principals and process are.

In the next couple weeks, I hope to have my surprises out for 2019.


• Biotechnology Breakthroughs of 2018 — A Mid-Year Review: https://tinyurl.com/y8886q36

Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd and can be contacted at nkowalski@anchor.bm. Disclaimer: The sole responsibility for the content of this article, lies with the author. It does not necessarily reflect the opinion, policy or position of Anchor Investment Management Ltd. The content of this article 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 or for any other purpose. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable. They are not necessarily all-inclusive, are not guaranteed as to accuracy and are current only at the time written. 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 professional financial advisers prior to any investment decision. The author may own securities discussed in this article. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. The author respects the intellectual property rights of others. Trade mark or copyright claims should be directed to the author by e-mail