Magazine article The Spectator

The Perils of Insouciance

Magazine article The Spectator

The Perils of Insouciance

Article excerpt

A good general rule for investors is to take no notice of consensus predictions about what is going to happen in the next 12 months. The track record of year-end investment punditry is consistently poor. That makes the Christmas and New Year period particularly hazardous for the unwary investor, as the demand for forecasts is at its peak, and the capacity for misdirection consequently also high.

This is especially so for those who are not aware of J.K. Galbraith's adage that economists forecast 'not because they know, but because they are asked'. One professional investor of my acquaintance has turned forecasting folly into a source of insight. Ken Fisher, an investment manager from the West Coast of the United States, logs the market and interest-rate predictions of all the mainstream market forecasters in the US, who are legion. His own forecast is then based on the simple premise that the actual out-turn in any given year, whether for interest rates or stock markets, will not fall into any of the bands that more than one expert expects. So far his results have been remarkably successful. Most of the time, he finds, most forecasters cannot even get the direction of the stock market right, let alone the scale of the change.

As the City's pontificators are still working on their predictions for 2007, it's too early to tell in which wrong direction this year's endof-year consensus will go, but looking back on the investment story of 2006 will make pleasant reading for most investors. Despite dire warnings about the likely impact of higher interest rates and the collapse of US house prices, 2006 looks like ending as a year in which insouciance, or disregard for risk, has again paid off handsomely.

Despite a minor panic attack in financial markets between May and July, most types of assets will make positive returns this year.

The US Fed's decision in August to call a halt to two years of successive interest-rate increases helped to re-energise most markets after the mid-year setback. The continuing availability of cheap credit has again helped to push a wide range of asset prices higher.

Record auction-house prices for Old Masters and vintage wines, crazy happenings in the top end of the London housing market, Iraqi government bonds selling on a 9 per cent yield and booming mergers and acquisitions activity around the globe -- all ultimately lead back to the easy-money conditions that have helped push so-called risk premia (the margin that investors allow for things to go wrong) near to all-time lows. Not for many years, in fact, have so many financial assets been priced for perfection -- that is to say, on the assumption that good times will roll on. Warnings by the Bank of England and other central bankers of unsustainable returns on some of the more buoyant asset classes -- such as housing and private equity -- have fallen on cloth ears.

This year's market indicators therefore paint what may be a misleadingly comforting picture. Commercial property has again led the way in 2006 with a total return of nearly 20 per cent. While bond prices have mostly been flat or falling, stock markets in general have had a good year, with the MSCI world index showing a total dollar return of 19 per cent and the FTSE All-Share index a return of some 12 per cent.

In terms of individual markets, the story has not been quite so straightforward. …

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