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No Crystal Ball: Year in Review

‘Investors are bracing for another year of event-driven volatility on the Australian share market, against a backdrop of subdued growth and earnings.’ That was the warning of a local newspaper as the 2016/17 financial year began. So how did that turn out?


Looking at the calendar a year ago, one perhaps could forgive forecasters for warning investors of a rough year. The knock-on effects of the Brexit vote, the US presidential election and the prospect of higher US interest rates all loomed ominously on the horizon.

Indeed, one prominent investment bank guru in the AFR article said parts of the Australian market were already at that point in “bubble territory”. Another said oil stocks were shaping up as one of the few sectors likely to outperform as oil stockpiles returned to normal.

A third analyst quoted by the paper warned that the Australian market would at best struggle within a narrow range in 2016/17, “caught between bouts of market paranoia and a sobering backdrop of low growth, low inflation and low returns”.

In another prominent newspaper this time a year ago, Australian superannuation savers were warned that the investment outlook was “cloudier than ever” as fund managers contended with “wild financial volatility and economic uncertainty”.

“If anything, the outlook for markets is even more uncertain now than it was this time last year,” the paper quoted a leading analyst as saying.

A shame, then, if you had followed these gurus’ furrowed-browed advice, as Australian and global equity market benchmarks delivered returns of around 14% and above in the past financial year in Australian dollar terms.

Investors who overweighted their portfolios to low relative price stocks did even better than that, while emerging markets posted returns of just over 20% for the year. In terms of sectors, the experts got that wrong as well, with energy one of the worst performers.

As for all the “event-driven volatility” predicted a year ago, equity markets had an extraordinarily settled 12 months, despite events such as the US and UK elections whose outcomes caught many prominent media pundits off-guard.

According to one investment bank research paper, the period of low volatility that began around June last year is one of the longest such runs since the Second World War.

Naturally, with a new financial year now just getting underway, the newspapers are going into overdrive with very familiar-sounding analysis.

Asked to write one of these stories, a harried financial journalist can easily string together a convincing-sounding narrative that links the events that everyone is currently worrying about to the next 12 months in the market.

In one recent AFR article, for instance, the budget levy on banks, excessive consumer debt, geopolitical strains, a moribund retail sector, headwinds for property and a cloudy outlook for infrastructure are all thrown into the mix.

“Bullish predictions for Australian shares in the coming year 18 are in short supply,” the article concludes in a line that is shamelessly recycled every year.

Of course, like a stopped clock, bearish forecasts can always turn out to be right. But basing a long-term investment strategy on these calls is not likely to be successful.

A better approach is to let the market do the worrying for you and build a diversified portfolio around the long-term drivers of return. After a strong year in shares, for instance, your advisor may choose to rebalance the portfolio back to its strategic asset allocation by shifting from equities to fixed interest.

But this is not based on a forecast about what might happen with geopolitics, economics, commodities, interest rates, currencies and shares in the year ahead, but on what is going on in your life and how you are tracking relative to your pre-defined goals.

The experts are entitled to their views, of course, but we have seen that their record in predicting what markets do year-to-year is not great. And if they really did have a reliable crystal ball, ask yourself why they would share that insight with you anyway.

So do yourself a favour. If you must read media tips for financial markets in the year ahead, take the forecasts with a very large dose of salt.

Post originally written and published by Jim Parker, Vice President, Dimensional Fund Advisors.