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Analysts’ forecasts are mostly a waste of time.
It’s not helpful to know that someone thinks that the FTSE 100 will end the year at 6,000, or 7,000, or even 8,000.
And it’s not particularly interesting to hear a lot of waffle about “Brexit uncertainty” or “trade tension” – it’s nothing you haven’t heard before.
But there are a few forecasts I do like to pay at least a little bit of attention to.
And those are the ones that no one thinks are likely to happen.
Is 2019 a good year to buy Brazil?
Every year at this time of year various pundits release their most “out there” calls for the year ahead. These are often done as much in the spirit of grabbing attention as anything else.
But for an investor, they’re also among the most informative forecasts to take a look at. Why?
It’s nothing to do with their accuracy or lack of it – these calls are about as likely as anything else to happen. Instead, there are two main reasons they’re worth paying attention to.
First, it’s often more useful to have an idea of what markets consider to be “out of consensus”. You’ll often be surprised by how little it takes to be viewed as a radical thinker.
Second, you’re more likely to read something that makes you question your existing assumptions and genuinely makes you think about a threat or an opportunity that you hadn’t spent much time on.
So what “out-there” calls have caught my eye this year?
Byron Wein, a well-known analyst at Blackstone, issues ten “surprises” at the start of every year. He defines a surprise as an event that “the average investor would only assign a one out of three chance of taking place” but which he views as “probable” – ie having a probability of more than 50%.
To put it bluntly, Wein had a pretty weak year in 2018 – his political calls (Jeremy Corbyn to be UK prime minister, China to cut off North Korea, Republicans to lose control of both the Senate and House of Representatives in the US mid-term elections) were all duds.
His market calls were better – he called for a stronger dollar, and a 10% correction in the S&P 500. But he still reckoned that the index would end the year above 3,000, which was way off. And he also expected the US oil benchmark (WTI) to move above $80 a barrel.
So what’s he predicting for this year? To be honest, nothing very interesting. There’s a Pollyanna-ish tone to his views – weaker growth will mean the Federal Reserve doesn’t raise US interest rates, which will send the stockmarket higher by 15%. Meanwhile, even although the dollar remains flat, gold will go down to $1,000 an ounce because of the general “risk-on” tone.
One interesting idea, though, is that the outlook will pick up for emerging markets. “China leads and the Shanghai composite rises 25%. The Brazil equity market also comes to life under the country’s new conservative leadership.”
Brazil is a notably popular “outside” call this year, with Blonde Money also highlighting Brazil, reckoning that it’ll become the fastest-growing global economy due to president Bolsonaro’s reforms.
Is Brazil a good punt for 2019? It certainly is among the cheaper markets in the world, according to Star Capital (who very conveniently keeps an eye on various valuation measures, including the cyclically-adjusted price/earnings ratio, for markets around the world). It’s one we’ll investigate further in the next issue of MoneyWeek magazine (if you’re not already a subscriber, sign up here).
A debt jubilee in Europe and a German recession
What about the downside? SaxoBank released its latest “ten outrageous calls” report, which always strikes a nice balance between being genuinely unlikely, yet not entirely impossible. One such warning is that a massive solar flare could cause $2trn of damage around the globe as a “coronal mass ejection” takes out orbiting satellites en masse.
While this is an interesting story, it’s not really something I feel investors should spend a lot of time preparing for (this sort of thing is why you own gold).
Of more interest are two ideas: one is that Germany could enter recession due to a downturn in the car industry and its own slow adoption of electric vehicles. Certainly, if globalisation continues to retreat in 2019 – which would hit export-oriented Germany hard – then this one doesn’t seem all that far-fetched.
The other call is pretty far-fetched – but less so than you might think at first. This is the idea that the European Union could announce a debt jubilee. Put it that way, and it sounds unbelievable. But when you look at the mechanism by which it could happen, you can see how a very quiet version of debt jubilee, shrouded in bureaucratese, could in fact happen.
How? Let’s say interest rates spike and Italy runs into a sovereign debt crisis. Fear spreads and you effectively get a repeat of the fears of contagion seen during the Greek crisis, only this time the likes of France are affected.
The only option could be to fully monetise debt. Christopher Dembik at Saxo paints a scenario whereby the European Central Bank (ECB) is given the go-ahead to monetise debt levels above 50% of GDP (in other words, write the debt off by buying it from the governments in question), and then guarantee the rest.
Does this seem likely? Not at all. There are quite a few steps the ECB could take before full-blown monetisation became necessary, and the idea of Germany giving the nod to this is very implausible indeed. Yet it’s food for thought – and you have to wonder if perhaps other nations, with fewer qualms about monetary strictness, might be tempted down the jubilee route (writing off student debt has always seemed a likely starting place in both the US and the UK for example).
Anyway, we’ll have more on some of the most interesting-looking “surprises” for 2019 in the next issue of MoneyWeek magazine – subscribe now if you haven’t already done so.