The experts all agree …
On the face of it, the “Business Day” section of the “Sydney Morning Herald” of 29 September 2010 was full of valuable insights into the future that astute investors could not ignore. Reporting on the proceedings of the high powered Forbes Global CEO Conference and Goldman Sachs global macroeconomic conference, it included such headlines as:
“Prices for commodities, food set to ‘rise sharply’”;
“Signs point to $A parity”
“Time for All Ords to break with the Dow”
“Captains of industry pull in one direction”
The gist of the accompanying articles was that the “experts” all agree. China and other developing countries would be the engine of world growth for the foreseeable future, driving up commodity and food prices. This would benefit Australia, enabling it to decouple from the sagging fortunes of the developed world and put continued upward pressure on the Australian dollar.
A comment by a panelist at the Forbes conference suggesting you should “go long on what China is short on” was singled out for its succinctness in capturing the collective “wisdom”. But while such talkfests might provide great copy for newspapers, do the views and opinions offered provide any meaningful guidance for serious investors? We don’t think so.
“Prediction is very difficult, especially about the future”
The links between apparently well reasoned macroeconomic forecasts and desired investment outcomes are simply too tenuous. There are just too many holes in standard forecasting methodologies to make them anything more than interesting information for investors.
For a start, the views expressed at the Forbes’ and Goldman Sachs’ conferences, like most forecasts, are essentially extrapolations of the recent past. They feel right, largely because they are consistent with what we already know. But economic forecasters are notoriously bad at picking turning points. They can’t tell us when or why a trend is going to stop.
And even in the absence of “shocks”, trends cannot go on forever. They will eventually bring about their own undoing. Commodities and food cannot just keep on getting relatively more expensive. Higher prices will bring about responses on the supply side, perhaps technologically driven, that can quickly change perceptions of what now appears an excess demand issue. An ever higher Australian dollar will make the export and import-competing sectors of the Australian economy increasingly uncompetitive, producing countervailing downward exchange rate pressure.
But we also think what the experts are currently indentifying as the pressures for commodity and food prices to continue to rise have more to do with why prices are where they are now, rather than where they will be in the future. Surely, if there is such apparent consensus on the future, markets have already adjusted to take account of these widely held expectations. To justify further rises, new (i.e. and, therefore, currently unknown) information needs to emerge. Investors are unlikely to be able to profit from viewpoints already reflected in prices.
However, even a correct reading of the broad macroeconomic trends, through luck or skill, does not provide investors with a guarantee of success. Just as in the 1990’s, when the massive growth in communications and information technology was accurately identified, investors attracted to agriculture and resources could end up worse off.
While most 1990’s forecasters saw potential riches for investors that hopped on the technology boom, the ultimate winners were consumers. Huge amounts of capital were poured into the sector, sometimes indiscriminately, resulting in massive growth that was essentially profitless.
The agriculture and resources sectors may be the next recipients of abundant global capital looking for the “next big thing”. Already, we have seen a steady stream of developing economy (i.e. BRIC) managed funds, catering to investors wanting to jump on the emerging trends. But the trick is not necessarily identifying the trends, but the companies that are going to prosper from them i.e. the next “Google”. This can be like looking for a needle in a haystack.
An “obvious” trend may be a not so obvious trap for investors
So, despite the positive growth outlook for China and other developing countries, with the associated potential flow on effects to resources and agriculture, the Australian economy and the Australian dollar, there is no easy money waiting on the table for investors who embrace this “story”. It is old news and markets, including global share and foreign exchange markets, have already responded.
In fact, it is argued by some that there is so much positive interpretation of the future built into the prospects for the Australian economy that both the share market and the Australian dollar would react extremely adversely to negative surprises.
But just as we don’t think you should be making any changes to a well formulated investment strategy based on overwhelming positive opinion regarding the Australian economy and Australian dollar, we also don’t think you should react to these cautionary, but equally speculative, negative views.
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