The Folly of Forecasting!

Patchy record : Predictions made in the beginning of 2015 have woefully gone wrong

As the year draws to the close, one thing that is not in short supply now is the rising number of predictions for 2016. Be it market levels, stock picks, hot sectors, there is no dearth of flashy forecasts. From mainstream media to business dailies, predictions for the new year are the buzzing topics. This column is not about dissecting those forecasts for its veracity, but to study how previous year’s predictions have panned out in reality and provide insights into how much one can trust these forecasts.

Let us start with predictions for market levels that were made last year. Below chart brilliantly captures the madness. If the race here is for how far one is off the mark, top global banks were the ones leading from the front. Ivy banks outbid each other gleefully with their gloated forecasts for the coveted prize. Nomura nudged the rest to gain the top slot with its outrageous forecast of near 34K for Sensex by 2015 year end. Though trailing, other banks were not far behind in their foresights. Their forecasts were equally macho with the median running at 33K+. They did downgrade their forecasts as the year unfolded, but could not match up with where Sensex has finally ended up. At 26K level now, Sensex has left the seasoned banks high and dry with their frivolous forecasts. Smart money is not that smart, after all.

Prediction1

Now, moving on to forecasts on stock picks, the story is equally stunning. Credit Suisse in its July 2014 report came out with top 10 investment ideas for India, citing India’s macro sweet spot on structural rerating potential. Performance of these ten stocks has been captured graphically ( in two charts) since that stellar recommendation. No hiding place for Credit Suisse. Much of them  have been teetering on tiny gains (except Asian paints) while one (Oil India) has woefully lost serious money for investors.

Credit Suisse Top 10 Investment Ideas (July 2014)

Prediction3

Prediction4

Forecasting is fabulous for making flashy headlines and news stories, but much less use for any serious investment decisions. Macro forecasting is fraught with risks not for any weird incomprehensible reasons, but because it is a function of  inter-dependant play of ever moving complex parts.  As Buffett says, “Prophecy reveals far more of the frailties of the prophet than it reveals of the future”. If past year is any guide to go by, investors are better off to ignore the hot buzz around what is in store for 2016. Sticking to basics, staying on the ground with unrelenting focus on stock picking would deliver far handsome results than any crystal ball gazing , however much stimulating intellectually though. Watch out for another stellar year for stock picking!

Wish you a great and prosperous Happy New Year.

Happy Value Investing!

 

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Tough Get Going

Tough Get Going

Rupee  likely to emerge unscathed from the ongoing Fed jitters

When it comes to handling Fed cycles , rupee’s record has been patchy and much less reassuring. Rupee got ruinously ravaged in much of the previous Fed cycles. That has prompted some of the seasoned pundits to raise an alarm on rupee ahead of Fed rate hike this week. More so , with rupee briefly breaching an important technical level of 67 on Monday. Is this time different.

Markets rarely wait for the event and they discount it much ahead. If that is the case, currency markets ought to have already factored the impending Fed hike, much of it if not fully. If the wobble in the world currencies over past few weeks is anything to go by, most of the emerging market currencies have  already been mauled by the manic markets and further damage if any  is least likely. If one is looking for more comfort on this, it can come from the way the dollar index has been dancing. After briefly breaking 100+ a week back, it has come back to settle around 97-98 level (closer to the fed event), reflecting some retracement in currency markets.

If much of the mayhem is already over, then it is not unreasonable to say that rupee has emerged relatively unscathed in this cycle. Look at the chart below that captures the performance of the emerging market currencies in the current year. Rupee has barely budged with just about 5%+ fall this year  while the average fall for other currencies have been around 15%+.

While much of the credit for this stellar performance goes to improved macro on cheap crude, surge in FDI flows on new Govt’s friendly foreign policies and central banker Rajan’s rock-star credentials have contributed no less. This time is quite different as rupee is in safer hands.

Rupee_Cy15