As a stock market investor, how should you have positioned yourself for that view? Maybe you would have invested in Germany or perhaps, given its solid record of positive performance in the third year of a presidential election cycle, the US.
If you had, you would have been wrong and it is no slur on your investment skills to suggest that, even with hindsight and knowing everything you do today about what happened to the economies of the world in 2011, you still may not pick the right answer.
For, according to data from Societe Generale, with the US’s S&P 500 index ending 2011 where it started, the only developed-world stockmarket to finish that year up in absolute terms – in the process outperforming leading emerging markets such as Mexico, South Africa, South Korea and the BRIC powerhouses of Brazil, Russia, India and China – was…Ireland.
Performance of indices in 2011
Source: FE Analytics
OK, so its absolute performance wasn’t great but, at the start of 2011 and given everything you knew about the country’s economy, its housing market, its banks, the state of the euro and so forth, would you even have expected that?
Over 2011, the US was flat as a pancake and Germany fell almost 15 per cent while the emerging markets as a whole lost 20 per cent.
Ireland may not have risen by much but it was the only national equity market of any size to manage even that and, in doing so, it significantly outperformed most other developed and emerging markets.
This neatly highlights the issue with macro-economic forecasts. Even if they are correct – and many studies highlight the near impossibility of being correct on a consistent basis – there is no market for GDP futures. You have to know how to implement that economic forecast into a money-making position.
Almost any macro forecaster would have been bearish on Ireland at the start of last year – and rightly so because the economy did badly. But the country’s stock market went up.
How is that counter-intuitive move possible? The seeds of that outperformance were ironically sown by the poor macro-environment itself.
Economies with a poor growth outlook are those markets which nobody wants. As such, investors reduce their exposure, in the process pushing prices down to very low valuations.
Ultimately, there is a wealth of evidence that shows that the most important determinant of whether you make money when investing is the price you pay.
When you buy a stock or a stock market that trades on a depressed valuation, you are much more likely to make money than if you buy a fast-growing, exciting, expensive stock.
For those with long memories, this is the same phenomenon that made utilities and tobacco such great investments in the year 2000.
Performance of indices since Jan 2000
Source: FE Analytics
Human beings can often be very bad at looking beyond the current environment and thinking about what may be. This means that forecasts of the future, which will inevitably be different to today, are likely to be incorrect.
Indeed, a study by the Federal Reserve in the US looking at economic forecasts (including their own) shows that over time, not one economic forecaster demonstrated an ability to consistently predict the future with any accuracy.
This should come as no surprise to us as forecasting the future is really difficult. After all, if a weatherman struggles to predict the weather for tomorrow, what hope does an economist have of predicting the economy in a year’s time?
An important point to make is that macro-economics are not irrelevant. The fortunes of an economy will clearly have an impact on corporate profits.
However, given how bad humans are at predicting the future and the additional difficulty of exploiting that view, we prefer to side with 130 years of stock market data, which suggests you are significantly better off focusing on valuation as your investment road-map.
Kevin Murphy has run Schroder Recovery since July 2006. Over this period, the £348m portfolio is up 81.49 per cent, putting it in the top decile of its IMA UK All Companies sector.
Performance of fund vs sector and index since July 2006
Source: FE Analytics
It is also a top-quartile performer in the sector over one, three, five and 10 years. Murphy heads up the fund with Nick Kirrage.
It requires a minimum investment of £1,000 and has an ongoing charges fee (OCF) of 1.52 per cent.