At the beginning of 2017, The Hutch Report completed a “Smart Money” analysis to highlight how the smart money was looking at the markets for 2017 and beyond. It was meant to provide a high level overview based on an aggregated synthesis of the macro views of the world’s Top 50 largest wealth management institutions.
Now we are looking back on all the forecasts made by these “Smart Money” managers and institutions to see how accurate they were in predicting the future or if they were just exhibiting an “Illusion of Understanding.”
Central Banks and Monetary Policy
Federal Open Market Committee (FED)
The consensus (40%) of wealth management firms predicted two hikes in 2017 of 25 bps each hike which would bring the Fed Funds target rate to 1.25%. Roughly 8% predicted three rate hikes. No precise forecasts were provided as to how much or when but of the wealth management institution outlooks reviewed, they all indicated an expectation that Central Bank monetary stimulus policies (eg. quantitative easing) would start to weaken.
On December 12-13 the Fed raised rates for a third time. Only 8% of our wealth management professionals got it right.
The FOMC did announce a tapering plan at the September 2017 meeting and have started in October by letting $10B in bonds mature each month and will slowly increase that number to $50B. As a reminder, in 2008 the FED balance sheet was $800B. It is now at about $4.50T as a result of QE.
European Central Bank (ECB)
Taper would commence second half of 2017. One dissenter stated the ECB would be unable to discontinue QE.
The ECB did not make any rate changes for overnight credit in 2017 and that rate remains at 0.00%. They did not commence tapering in 2017. However, they did signal in October of this year that they would start tapering in 2018 by cutting in half the monthly purchases from the current rate of €60B to €30B.
The People’s Bank of China (PBOC)
The PBOC will continue to stimulate demand through adjustments of the reserve requirement ratio (the amount of money that the banks must hold as reserves).
In September of 2017 the POBC announced that in 2018 the reserve requirement ratio would be lowered for certain banks from 200 bps to 150 bps. In return for the reduction the banks must meet certain requirements for lending to small business, agricultural sectors, entrepreneurship and education.
Changing of the Guard
The next two years, 2018 and 2019, we will see some changes to the heads of some of the world’s most influential central banks.
Most people are by now well aware that in February 2018, Yellen’s term as Chair of the FOMC expires and Trump has nominated Fed Governor Jerome Powell as the next Fed chair. The post of the Fed chair is subject to Senate confirmation. The Senate Banking Committee has approved Jerome Powell which clears the way for the Senate confirmation vote.
At the Bank of Japan the current Governor is Haruhiko Kuroda and his term will be expiring in April 2018. Current headlines indicate that there is a strong likelihood that his term will be renewed as the Japanese government has expressed satisfaction with the BOJ’s policies under Kuroda.
In 2019, the terms for Mark Carney at Bank of England (BOE) and for Mario Draghi at the European Central Bank (ECB) will expire. Due to the bylaws of the ECB which state that the term of the ECB presidency is for an eight-year non-renewable term the ECB has to find a new president and it cannot be Draghi. It remains to be seen what will happen with the BOE Governorship as Carney has been seen as a strong leader.
Governments and Fiscal Policy
The consensus for 2017 was that the EU would experience a modest recovery but mitigated by concern, seen to be short term, on political risks due to rising anti-EU and populist sentiment but that this would be limited and most likely would not extend past the UK.
The EU economy so far has actually exceeded forecasts with real GDP growth expected to be 2.2% for the year compared with earlier forecasts of 1.7%.
Everyone was waiting with baited breath to see if populism and a BREXIT, separatist, type mindset would spread via the 2017 elections in 2017 in Europe – specifically in the Netherlands, the France and Germany. However, that did not come to pass and more centrist candidates won those elections. However, this did not mean that the populist and separatist parties went away. Even though Merkel won in Germany for a fourth term, the far-right, anti-immigration party in Germany, the AFD, won seats in the Bundestag with an historic breakthrough for the party and it is the first time in 60 years that an explicitly nationalist party sits in the Bundestag.
Meanwhile in Spain, there was a big push for Catalonia to separate from Spain. While the independence movement was effectively stifled the issue is far from being resolved as manifested by pro-independence parties renewing their majority in the Catalan parliament in the regional elections just held at the end of the year on December 21.
The consensus for 2017 was that the deflationary policies of the incoming administration with Republican majority in both houses of congress, will be positive in the short term for US equities (promises of tax cuts, repatriation of foreign US earnings and higher public spending plus a pledge to invest over $1 T in US infrastructure) Caution for the longer term with potentially greater inflationary pressure and the impact of populist and protectionist ideals.
During the course of the year and up until December, the Trump administration had not succeeded in passing any legislation. This caused some doubt during the year whether the administration would be able to succeed with the measures they had promised. The Trump administration finally did succeed in passing a much contested tax reform bill which was approved by the senate in December and then passed into law and signed by Trump on December 22. Much debate is still raging on whether the new tax bill, which among other sweeping changes cuts corporate taxes from 35% to 20%, will be effective in repatriating corporate money back into the US and whether this will translate to investment by those corporations into the US economy.
With regards to other campaign promises, notably the border wall, while many prototypes have been proposed there is still no clarity on how the wall will be paid for or what the next steps really are. Meanwhile the $1 Trillion in infrastructure spending does not have any more clarity either. In October of the year, Trump pivoted from a stance pushing for private investment and is now looking towards the treasury which would possibly imply further borrowing and using proceeds from taxes on gas.
Despite concern on a potentially rising USD along with interest rates which would negatively impact emerging markets, especially countries with a majority of their exports to the US like like Brazil and Mexico, the wealth managers were still predicting higher GDP growth in BRIC countries in 2017.
The final GDP rates are not yet available for 2017 however so far it can be said that: Brazil has exhibited modest GDP growth so far this year and slightly surpassed initial forecasts, while Mexico, which started off the year well in the first half of the year has not faired so well in the second half of the year due to disruptions from two earthquakes, subdued consumer spending and inflation. NAFTA negotiations are still continuing with the US and are expected to continue in 2018.
The majority of wealth managers estimated that Trump policies would help drive up the USD and provide a tailwind to Japanese fiscal policy would also weaken the Yen which in turn would strengthen the Japanese economy in 2017.
Despite a stronger Yen against the USD, Japan saw stellar export performance, supporting manufacturing activity, as highlighted by December’s PMI figure, which hit a nearly four-year high. Investment also benefited from resilient global growth, with business confidence in Q4 climbing to an over one-decade high. So the Japanese economy strengthened but not for the reason’s outlined by the wealth institutions.
The view was that Inflation would increase slightly in developed markets and despite the big question mark whether the central banks would be able to keep inflation in check following the massive reflationary measures they have taken the consensus seemed to be that inflation would be kept in check.
Higher inflation was forecasted in Asia due to less Asian central bank intervention.
For the developed markets, the wealth institutions basically got this one correct in their outlooks for 2017. The inflation rate in both the US and Europe increased the most in the first half of the year and is still trending slightly higher than it was at the beginning of the year. Concerning inflation in Asia, directionally the wealth management outlook for 2017 was correct. Whether or not the reasoning was correct is another story. The theory was that inflation would be higher due to less central bank intervention than in developed markets. This is a subject worthy of debate and whether or not less intervention is even true. For example, the Chinese central bank, the People’s Bank of Chine (PBOC), is suspected to have intervened several times in 2017 in order to keep the yuan propped up.
The historical experiment of quantitative easing in the US, Europe and Japan has seen unprecedented buying of bonds, driving yields down to historic lows. However, with the European Central Bank (ECB) and Bank of Japan (BOJ) running out of bonds to buy and facing the unintended adverse consequences of negative rates (for banks and insurers), 2017 was seen to be the final year for quantitative easing and negative rates. It was believed that political resistance to fiscal expansion would weaken, particularly in Japan. Therefore, the consensus was that there would be nowhere for yields to go but up.
The yields on the US 10yr began the year at 2.45%, however, despite 3 rate increases from the Fed, the 10yr yield spent most of the year lower, closing at 2.405%, going against the consensus view of higher yields.
The Eurozone 10yr government benchmark yield began the year at 0.86%. It spent most of the year above this rate and closed the year at 1.05%. German 10yr yield began at 0.189% and finished at 0.427%. When referring to the Euro Zone the consensus got it right.
Japan continues to confuse many. In July, The Bank of Japan offered to buy an unlimited amount of JGBs, as it sought to put a lid on domestic interest rates pushed higher by the broad sell-off in developed market bonds. JGB 10yr yield began the year at 0.046% and finished at 0.048%, essentially staying flat.
In regards to public equity, a large majority, nearly 85%, of those with a positive outlook on equities were positive on headroom in the US equity market. Following the US equities market there was no other region or country for which the reports reviewed indicated a majority positive outlook in general for equities, however, close to 50% were favorable on Japan, followed in this order, by Europe, Emerging Markets and then Asia.
The cap-weighted S&P 500 gained 19.42% on the year, whereas the average stock in the index was up less than that at just over 18%. Regardless, 85% of the smart money managers were correct in forecasting higher equities for 2017.
Close behind, the Japanese Nikkei gained 19.10%, where only close to 50% envisioned such a strong performance.
The Euro Stoxx 600 index closed up roughly 7%.
There was a clear and overwhelming agreement that the new Trump administration policies would be bullish for the US dollar. In addition to the US government policies, it was also believed that the Federal Reserve would begin to increase interest rates, which would in turn also be bullish for the US dollar. Where there was lack of vision was to how high the US dollar would rise, but it was expected to rise throughout the year of 2017.
The view regarding the Chinese Yuan (also recognized as the Renminbi) was that it would remain weak against the USD for some time. However, the majority was expecting the Yen to depreciate further against the US dollar into late 2017.
There were a number of elections coming up in Europe and that was expected to increase risk and put downward pressure on the Euro. The expectation was that it would reach parity with the US dollar.
Not everything worked out as neatly as planned by our smart money managers. 2017 was a nasty combination of buy-the-rumor-sell-the-news for the Greenback. Action on Fed tightening and fiscal reform, more weight on disappointing data versus upbeat results, and the “Trump effect” left the US dollar sliding for most of the year.
The 2016 close for the EURUSD cross was 1.0517, however the close of 1.2004 destroyed the dreams of all those banking on parity.
The USDCNY cross began the year at 6.96 and ended at 6.50. The US dollar’s unforeseen slide helped to bump up the Yuan against the USD going against the view of a weaker Chinese Yuan for the year.
Last but not least, the US dollar lost 3.69% to the Japanese Yen, going against the majority view that the Yen would continue to depreciate against the US dollar in 2017
80% of the researched wealth institutions believed that the commodity cycle had based and was set to recover, however, the market structure remained a challenge and fundamentals across many raw materials continued to point to concerns of an oversupply. For this reason, there was not an overly bullish view on commodities but a wait and see neutral one.
Concerning Oil, we found a range of forecasts from $45 to $65 a barrel with no clear majority on any one price point. Oil started the year at $52.46, fell to as much as $42 and rebounded to end the year at roughly $60 a barrel.
There was no clear agreement when it came to Gold, however, as the majority linked the performance of gold to the USD, and that same majority expected the USD to rise (indicating Gold would fall, or stay range bound at best) were all off the mark. Gold ended up roughly 13% beginning the year at $1,150oz and ending the year at roughly $1,306oz.
New Alternative Investments
What a difference a year makes! Bitcoin was a curiosity at most at the beginning of the year, however its stubbornness to sell off for any extended period, while it continued its meteoric rise, forced wealth managers to take notice.
It began the year at roughly $984 and continued to rise to $19,211 before rounding out the year at $12,610, beating any other asset class (although the debate is still raging about whether or not Bitcoin is an asset or other). Regardless, Bitcoin is now something to be reckoned with and will not be taken so frivolously as it was in the beginning of the year.
Along with the rise of Bitcoin came a host of other Alt coins and ICOs (initial coin offerings), however, as far as professional money managers are concerned, Bitcoin is the main act for the moment until proven otherwise.
We also mentioned Bitgold in our report which was the idea of a cryptocurrency backed by the equivalent amount of gold. It was believed that this would stabilize the volatility seen in pure cryptocurrencies and provide them with an air of respectability. However, it is still too early to know if this will take hold and for the moment this concept is not really of interest to the professional investment manager.
Our special report on Gold Backed Cryptocurrencies supported this lack of interest as we researched all the principle players in the area, large and small and found them largely lacking in many areas.
2017 was not an easy year for our wealth management institutions in many respects. There were no great winners or losers.
Will 2018 prove to be any easier? We don’t know, but if the smart money is having such a difficult time making sense of all these moving pieces you can bet that the dumb money is at a complete disadvantage (unless they bought and held Bitcoin, which currently would make them look like the smart money….for the moment).
A principle lesson to be learned is that all these forecasts that appear in these glossy yearly outlook reports, quarterly reports, weekly reports and minute by minute reports that continue throughout the year on your local financial media networks, by all these institutions that manage the largest fortunes are just that, forecasts.
Everybody speaks in their best interests which makes following these prognostications and forecasts all the much more difficult and more often than not puts you, as an investor, at a disadvantage because you are more likely than not to be buying from those who are selling (which happen to be the same people which have advised you to buy). Therefore, don’t listen to the smart money, follow the smart money.