We all want to know what will come next, but so far, nobody has discovered a way to find out. This is as true about economics as it is about anything else. The late Canadian-born economist John Kenneth Galbraith contended that the only function of economic forecasting is to make astrology look respectable and it is certainly the case that economists have an unenviable track record. Nonetheless, we are persisting with our custom, now five years old, of presenting our predictions concerning the markets for the coming year.
Every year brings unpredictable events. During the last few months alone we have had the great debt ceiling debate in the U.S. congress, the fall of governments in Libya, Egypt and Tunisia, and most recently, the Greek referendum flip flop. It is fair to say that while the problems of high sovereign debt in Europe were widely recognized years ago, few foresaw the impact that the Euro-zone problems would have on the market this year. Similarly, in 2007 many understood the reality of the real estate bubble in the United States, but few predicted that it would lead to the meltdown in the global banking system that ensued in the fall of 2008. Tsunamis in Japan, hurricanes in the Gulf of Mexico and crop failures in Russia all have real impacts on the market, but are totally unpredictable. So why bother trying to foretell the future?
We try because, as investors, we have no choice. We must decide what to buy and what not to buy. We must choose among all the possible investment vehicles open to us, and we must keep choosing on a daily basis. Looking at the predictions we made a year ago in our “Outlook 2011” gives us some comfort. Here is what we said last year, and what actually happened:
Interest Rates and Currencies:
• “Interest rates will remain low across the yield curve.” Correct.
• “We expect to see rates start to rise in the second half of 2011”. Incorrect. The weakness in the U.S. economy has kept rates low for longer than we expected.
• “The Canadian dollar will average about par with the US dollar”. Correct (actually 98.7).
• “The Canadian dollar should rise to about .75 Euros in 2011”. Correct (actually .73).
• “Banks will raise dividends and show better profits”. Correct. All three of the banks we hold raised payouts. However, bank stocks have had a mediocre year due to Euro-based fears.
• “Telecoms will benefit from rising demand”. Correct. Telecom has been the best sector on the TSX in 2011.
• “Utilities will be the most consistent sector”. Correct. Stocks such as Canadian Utilities, Transcanada Corp. and KeyEra have been big winners.
• “Commodities will show continued increases”. We were partly right. Oil is up, copper is flat, agricultural commodities are down. Shares of most producers are down for the year.
• “Real estate companies will benefit from the recovery”. Correct. All of our large holdings such as Morguard, Crombie and H&R have had good years.
• “Quality retailers should see above average growth”. Correct. Our largest retail holdings (Shoppers Drug Mart, Tim Hortons, Empire Group) have outperformed the market by a wide margin.
• “U.S. multinationals will benefit from increasing non-US demand”. Partly correct. However, stock prices did not react to rising revenues and profits.
• “Technology companies will benefit from infrastructure spending”. Correct. Profits have been very strong, but stock prices have been flat for the year except for companies such as Apple.
• “Dividend payers will be in demand”. Correct. Low interest rates have driven demand for steady income producing stocks.