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Forecasts in financial markets: illusion or reality?
Wed, 02/07/2024 - 11:03

José Luis Cabrera Fuster

¿Cómo analizar y utilizar los ETF?
José Luis Cabrera Fuster

CIO de El Dorado SAF S.A.

Every beginning of the year, economists and investment industry professionals unfailingly make forecasts about the future behavior of financial assets and include investment recommendations; a kind of groundhog day in which the future is magically revealed before our eyes. Will it be possible to have the crystal ball?

The projections are made based on assumptions of the main macroeconomic variables such as growth, interest rates, inflation, business cycle, among others, based on the recent and not so recent past.

Are we really doing it well? Reality and perception

Unlike physics, which is governed by immutable laws that allow precise estimates of certain phenomena, predictions of economic and financial variables are subject to a changing environment that can quickly invalidate such forecasts, from heroes to villains in one day! Various studies show that even professional managers are not entirely accurate and those who are, do not show consistency. Not for nothing, 75% of managers are unable to beat the returns of the S&P500 index!

Change is the only permanent thing

The Greek philosopher Heraclitus was very right when he pointed out the permanence of change. We live in changing environments where the macroeconomic and financial environment is more volatile than the last 40 years (period known as the great moderation). As investors, trying to forecast very short-term horizons (1 to 6 months) is complex due to the high noise. and volatility present; most likely we will fail miserably in our attempt.

Beyond specific forecasts which is equivalent to winning the lottery we must build scenarios, determine which assets will perform best and make allocation adjustments (tactical movements) with respect to our base or strategic portfolio. That is, choosing our “winning horses” and reviewing our scenarios periodically based on new available information.

Notes for this 2024

Despite what has been said, making projections has value. In 2024, low growth is expected (the consensus estimates 2.6% global growth), controlled inflation and the beginning of interest rate cuts in developed markets. In this scenario, high credit quality intermediate-term bonds (remember that rate reductions positively affect the performance of bonds with a longer average life) look more attractive than those of stocks that presented record returns in 2023 (the S&P 500 returned +24%) that could have more modest results this year. Additionally, high-quality fixed income historically tends to do well in periods of cooling and can better withstand slower growth. Do you already have your winning card?