Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016.
The biggest miss among analysts, according to Nomura’s Sam Bonney, was overestimating US growth and inflation prospects. The consensus in January was for economic growth of 2.5 per cent and average inflation of 1.8 per cent, in contrast with actual growth of around 1.5 per cent and inflation at 1.3 per cent.
The Fed was expected to raise interest rates three times by the end of the year, while we’re still waiting for a first bump up of the year next month.
That caution was encouraged in part by the most obvious failure on the part of markets this year: as Nomura delicately put it, “political events didn’t unfold in the way analysts thought”. June’s Brexit vote and Donald Trump’s presidential election victory both shook markets, with the pound and Mexican peso respectively 17 and 24 per cent weaker than forecast at the start of the year.
On the flip side, China “didn’t implode”, and Brazil was more stable than expected. Investors’ forecasts for smaller G10 economies were also off, with Australia, New Zealand and Sweden performing better than expected (except Sweden’s currency) and Norway and Canada both disappointing.
After all those misses, Nomura considered a 20 per cent revision to oil price forecasts relatively successful. Brent crude has remained close to the $46 forecast at the end of February, if not the $57 expected at the start of the year.
An accurate dollar forecast also comes with a caveat: while predictions were “almost spot on”, it wasn’t necessarily for the right reasons, driven by the weakness of sterling and a late post-Trump surge (which, as discussed, investors weren’t entirely expecting).
If, after that, you still have any faith in the market’s forecasts (or just want to know what to avoid), Nomura says the current consensus for next year sees faster growth in the US, weakness in emerging markets and outperformance from the Scandinavian currencies. Most ominously, they also appear to think major political risks are “behind us”. Luckily there are no major political events coming up…