A YEAR of ice or a year of fire? Despite all those fussy new nanny rules governing investment advice – or perhaps because of them – my e-mail inbox has been unusually filled with New Year stock market predictions.
These never cease to surprise. If experience teaches us anything, it is that investment is a multi-year marathon, not an annual sprint. If the predictions of financial advisers and fund managers were anywhere near accurate in previous years, they would now all be basking on their yachts off Grand Cayman and would have no need to send earnest e-mails to the likes of us.
There is another curious feature of these end-of-year prophetic round-robins. The scary ones predicting a stock market slump are more or less evenly matched by those predicting better times ahead, a continuing market rally and giddy forecasts of the FTSE 100 pushing every higher.
Bill Bonner, founder of Money Week, has sent me an audio message lasting almost an hour predicting a hair-raising economic and social collapse. It is all going to be terrible and I need to take avoiding action “NOW!” Against this, a fund manager confidently predicts that the FTSE 100 will climb as high as 7,000 because the bond market bubble will burst.
I have particularly enjoyed the bulletins predicting the onset of a new bull market, the first for many years, jostling alongside those arguing that the bull market that has been raging since early 2009 is growing tired and will sputter out early in the New Year. If we cannot even agree on whether we are in a bear market or a bull market, what is the worth of such predictions?
Between these two extremes can be found a large wedge of “cautious managed” fund managers predicting that the stock market will do very little at all over the next 12 months. That’s “cautious managed” for you. What did you expect – a worthwhile prediction of any sort?
The longest section of those “don’t expect anything much” cautious managed bulletins is the dense, closely-typed pages of regulatory warnings, caveats, escape clauses, exceptional event omissions, reminders that markets can go down as well as up, firm clarification that the predictions do not constitute a forecast and that anyone reading this should take independent financial advice before falling back in a regulation-induced stupor.
It is only human to seek to foretell the future and try to make sense of where we are and what lies ahead. The manner in which markets over the past two years have swung sharply between “risk on” and “risk off” positions – the past few weeks have seen a strong lurch towards “risk on” – reminds us how flimsy and insubstantial last week’s predictions can look.
Indeed, such are the volatile swings of markets that buy orders made on the strength of current predictions can come to look foolishly timed in a matter of days.
Markets, for all they represent the aggregate of human knowledge and analysis, are unable to predict the future with any certainty. This does not make investment a mug’s game but underlines the point about it being a marathon pursuit; long-term accumulation of capital, buying decisions spread over time, investment spread across different asset classes and sectors and interest dividend income re-invested. There may be a few, capricious exceptions to these golden rules, but not many.
It is also quite logical, in an Alice in Wonderland way, to hold two fundamentally-opposed positions at once. For example, I accept much of Bonner’s analysis that the UK is heading towards a financial and social crisis without modern precedent. And I cannot see a way out of the colossal debt and deficit problems we face other than by resort to inflation.
Equally, however, it is the onset of crisis that makes possible changes in behaviour that only recently would have been regarded as unthinkable.
I believe the prospect of austerity for years ahead will drive innovation and enterprise to lift prospects. We do not, as a rule, sit passively in the back of the bus as it accelerates towards a brick wall.
Predictions of better times for equities in 2013 need not rest on optimism. The strongest case for buying and holding shares currently is markets will grow increasingly sceptical over the argument for bonds and fixed interest, particularly given the heightened risk of inflation. Investors may show a preference towards hedging their bond bets and, taking a three-to-five year view, to step up exposure to equities.
Props to equity valuations include: central banks committed to do “whatever it takes” to avoid deflation and endless recession, ultra-loose monetary policy, and finance ministers under pressure to step up stimulative policies to boost employment and growth. It is for these reasons I believe equity markets in 2013 are biased to the upside: 6,500 on the FTSE 100 is not too farfetched – a gain of 9.4 per cent on Friday’s level of 5,940 – and that 7,000, while most unlikely, is not impossible.
However, this comes with a warning: second-hand crystal balls purchased from the Financial Services Authority are no better than any others and are non-returnable.
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Wednesday 22 May 2013
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