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The power of long-term investing

A review of last year’s forecasts show how futile predictions are.

A look back at the forecasts made for the expected performance of investment markets in 2012 this time last year shows up the folly, once again, of using ‘forecasts’ to determine and shape investment strategies.

At the beginning of 2012 the headlines were full of gloom and doom.

Global economic activity was tepid at best while the heat and noise surrounding the expected collapse of the European monetary union following on the near-certainty of a Greece withdrawal was reaching boiling point almost on a daily basis. This continued for most of the year dragging down markets to cyclical lows in June.

And as the year sped towards its ending, headline grabbing Greece and Spain was quietly replaced by equally doom-laden forecast surrounding the so-called ‘fiscal cliff’ in the USA.

The cumulative effect of this was that a great number of potential investors were kept on the side lines in cash while an even greater number of investors fled equity markets into cash at precisely the wrong time. They missed out on one of the best rallies in markets for a long time.

Banking giant Citigroup, for instance, put the certainty of a Greece withdrawal from the EU at 90% at one stage around the middle of last year. Greece, Spain and later on in the year Italy dominated financial media headlines, creating a sense of impending doom for risk-taking investors in equity, currency and commodity markets.

A January 5, 2013 analysis of 2012 forecasts on the Bloomberg website (Almost all of Wall Street got 2012 Market Calls Wrong) illustrates the dangers of relying too much on banner-headline forecasting.

For instance, hedge fund manager John Paulson (he manages $19bn in assets) lost a fortune for his clients banking on the collapse of Europe 2012.

Banking giant Citigroup put the odds of Greece pulling out of the EU at 75% and Morgan Stanley forecast a down year for global equity markets. Goldman Sachs chief executive Lloyd C. Blankfein, however, early on the year warned that the biggest risk for investors was being too pessimistic on markets, advising an increased exposure to equities in an era of negative global interest rates.

And then there are the perennial bears such as economist Nouriel Roubini—who have been forecasting a collapse of the global financial system for many years now.

In hindsight the ill-timed advice shows that even the largest banks and most successful investors failed to anticipate how government actions would influence markets.

Unprecedented central bank stimulus in the US and Europe sparked a 16% gain in the S&P 500 which included dividends for calendar 2012, investors who bought Greek bonds in May reported a windfall of 78% while investors in US government bonds, which was described as “dangerous” by legendary investor Warren Buffett, provided a 2.2% return.

The market value of global equities increased by $6.5trn last year as the MSCI-All Country World Index returned 17% including dividends.

Some of the best returns were earned in European countries at the centre of the crisis swirling around Greece, Spain and the future of the European Monetary Union. The German stock market was up 29% last year, for example.

It would appear as if fund managers, bankers and economists alike underestimated the political will of European leaders to keep the EU intact along with the determination of the US Federal Reserve to spend almost unlimited monetary firepower in an effort to keep interest rates low, increase employment rate and get economic activity to pick up speed.

South African equity markets too had a very good year with the average rate up 22% for the year on average, while certain sectors such as property was up a staggering 37%.

The resource sector, mainly as a result of declining global commodity prices and the events surrounding Marikana, was the only sector to record a negative return year last year.

This article was first published in Brenthurst’s Investment Report.

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