Experts’ predictions prove largely accurate

Investors will be aware that it is nigh-on impossible to forecast exactly what will happen in markets. But managers and economists can make informed predictions on how themes or asset classes are likely to play out based on their knowledge of the markets and access to economic data.

The general consensus was that 2014 would be a good year for equities with a rotation out of bonds.

Max King, portfolio manager at Investec Asset Management, offered a three-month view last December, which forecast that government bond yields would rise, providing a “difficult backdrop” for corporate credit, while he suggested there would be good opportunities to add value from stock selection.

He observes that by the end of April this year the expected consolidation had already happened. “The market had been resilient to quite a bit of bad news and we saw some changes happening,” Mr King explains. “The first of those changes was that inflation expectations continued to fall and bond yields came down and this reinforced our expectation of a relatively long economic cycle.

“Secondly, we saw that earnings downgrades, which had been relentless for a couple of years, seem to be at the point of slowing down quite sharply.”

He adds: “Finally, it seemed likely that in a world in which bond markets were at pretty expensive levels – and not just government bonds but corporate bonds and high yield, and in which property prices around the world were sky high – it seemed somewhat absurd to think equity valuations should remain restrained.”

That means he took a mainly positive view for which he was rewarded by what he refers to as a “grind upwards” in the market in May and June, which Investec expects will continue.

Frances Hudson, global thematic strategist at Standard Life Investments, expected the overall economic picture to be supportive of bonds back in December 2013, citing subdued growth and low inflation but pointed to policy divergence among central banks resulting in higher yields.

Her current outlook confirms that quantitative easing (QE) and “safe haven flows” have “driven core government bonds into expensive territory”.

On commodities, Ms Hudson hailed a more stable picture in China. She also identified at the end of last year that the lack of inflation suggested “minimal precautionary demand” for commodities, unless Middle East tensions were to rise.

She says now: “Inventory positions in some China-related industrial commodities are again causing concern, while the rise in geopolitical strife relating to Russia/Ukraine and Middle East oil producers is feeding into a higher risk premium in oil prices.”

In January, Mark Burgess, chief investment officer at Threadneedle Investments, referred to emerging markets as “a mixed bag and a wildcard” in 2014. Bestinvest managing director Jason Hollands also offered some cautionary words, reasoning that a US exit from QE could prompt a process of re-pricing of risk around the globe “which would be painful for these markets”.

China was another region where he suggested investors should exercise caution at the beginning of the year, as he claimed the country is “over-reliant on inefficient, debt-funded internal investment”.

At the halfway point in the year, Mr Hollands remarks: “While emerging market (EM) equities looked relatively good value at the start of the year, we felt it could be too early, with near-term risks remaining. The first quarter was indeed a tough period for emerging markets and in spite of a much stronger second quarter, returns from the MSCI Emerging Markets index have been flat over the six months.”

“China continues to be a concern, with little progress made so far in transitioning away from internal investment, much of which has been fuelled by an alarming growth in credit. On a more positive note the election of the [Narendra] Modi government in India has been a bright spot for emerging markets,” he suggests. “For a long-term investor, this could be a good entry point for emerging markets.”

Turning to the eurozone, Asoka Wöhrmann, co-chief investment officer at Deutsche Asset & Wealth Management, accurately forecast that inflation would remain low, although his presumption that there would be “no danger of deflation” was not entirely correct. There was some uncertainty as to whether the region would fall into a deflationary cycle.

Those who thought the European Central Bank would face pressure to act were right, although Mario Draghi and his colleagues have yet to act decisively on monetary easing.

Certainly no one in the industry can claim to have crystal ball-like powers but there were many who got it right this year. Perhaps this is as a result of the relatively low volatility environment that has so far characterised 2014.

Ellie Duncan is deputy features editor at Investment Adviser