New Zealand investment forecasts have been consistently off the mark over the last 20 years, according to a new analysis by Aon Hewitt NZ, particularly in picking short-term equity returns.
The Aon report – based on 20 years of data compiling market forecasts by NZ fund managers, brokers and banks – found a large mismatch between the returns of a notional balanced portfolio (split 50/50 between growth and income) versus the average predicted asset class performance over one- and five-year periods.
“The forecasts are much less volatile than actual outcomes, and they are almost always positive,” the Aon report says. “As a result the forecasters, in aggregate, typically under-estimate returns in the good times, and over-estimate returns in the bad times. This is not surprising, and it is consistent with other studies into investment forecasting globally.”
Somewhat predictably, though, the Aon study found a much closer correlation between asset class forecasts and actual returns in fixed income compared to equities.
“… this disparity between forecasts and actuals is really driven by the forecasters’ inability to predict equity market movements,” the report says. “For fixed interest markets, there has been a clear relationship between the forecasts and the subsequent returns – particularly over the longer timeframe.”
However, in spite of their historical short-comings New Zealand investment forecasters continue to issue predictions with Aon’s most recent aggregate data reflecting a sombre mood in the asset management industry.
According to the Aon data compiled in January this year, the aggregate forecast one- and five-year returns for all asset classes were well below the 20-year averages – over 70 per cent down in the case of NZ equities.
The Aon survey, produced by investment consultant Guy Fisher, shows aggregate forecast returns for NZ shares over the 12-month period of 2.8 per cent compared the 20-year average prediction of 9.7 per cent.
“For New Zealand equities, expectations are the lowest that they have ever been,” the Aon study says. “This pessimism reflects the general view that we are in a period of low global economic growth, and very low inflation – and this seems likely to continue for some time. In that kind of environment, strong returns from equity markets are seen as unlikely. And with interest rates at very low levels, returns from bonds are also likely to be low.”
While the overall assumption of low returns may be backed up by fundamental factors, the Aon study suggests the forecast results should be “taken with a pinch of salt”, especially around equities.
“With so much gloomy news already priced in, if global economic growth was to be better (or less bad) than expected this could be positive for share markets,” the report says.