Hope economists are right about the future? Don’t hope too much.
Craig Bodenstab, investment counsellor at Orbis Investment Management, spoke Tuesday on the shortcomings of economic forecasting for the investment industry at the Canadian Pension & Benefits Institute’s Investment Trends seminar in Toronto.
“We love to listen to self-assured people,” he said. “And we like precise forecasts.”
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However, nothing could be further from the truth. Bodenstab looked at forecast and actual U.S. inflation rates from 1984 to 2014. “Forecast inflation tells you more about rates today than what is going to be in the future,” he said. The result was similar for bond and equity analysts’ forecasts.
“The industry hasn’t predicted one single downturn in the previous 50 years,” he said. This is true for Canadian data, too. Mercer’s 2013 Fearless Forecast predicted the S&P/TSX Composite Index would increase by 7%. The actual was 13%—a difference of six percentage points.
Even forecasting of GDP growth doesn’t help predict equity returns or help investors avoid the worst markets, he said.
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Macroeconomics forecasting is difficult, he said. “Even accurate economic forecasts won’t necessarily help you make better investment decisions.”
In trying to predict the future, Bodenstab said nobody can do it. “There is one thing you can control and that is the price you pay for assets,” he said.
“Predicting the future is not only impossible, it’s misleading to our clients.”
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