One prediction for 2017
Jon Mills throws his hat into the ring and makes one big prediction for 2017.
The summer holidays mark quality time with the relatives, excessive eating and drinking, and the inevitable new year's resolutions.
They're also the time when various commentators forecast where the ASX All Ordinaries Index – or interest rates, house prices, the Australian dollar, commodity prices and so on – will be this time next year.
The media loves these predictions, presumably because journalists think their readers, viewers and listeners do too. Or perhaps it's because they think the forecasters really can predict the future.
Ignore them
However, in my view, if you're interested in buying stocks, you can safely ignore all these forecasts.
That's not to say though that changes in interest rates, foreign exchange rates, commodity prices and so on won't affect the value of your investments. Quite the contrary.
Of course the earnings of BHP Billiton (ASX:BHP) and Rio Tinto (ASX:RIO) will be affected by changes in iron ore prices or in the value of the Australian dollar versus the US dollar. And of course Commonwealth Bank (ASX:CBA), Westpac (ASX:WBC) and other banks will be affected by interest rate changes and the rates of economic and credit growth.
It's just that I think it's impossible for anyone to consistently and accurately predict these variables a year or even a few months ahead. I certainly can't, and so I think you should spend your time on more productive analysis.
What to do?
Instead, I'd concentrate on performing a fundamental analysis of the company you're interested in and only considering interest rates, foreign exchange rates and so on if material changes in them would affect your investment case.
For example, if long term bond rates rise back to more ‘normal' levels in coming years, consider the implications for companies that are heavily indebted and will need to refinance. Or the implications for commercial property prices and hence the value of listed property trusts such as GPT Group (ASX:GPT) or DEXUS (ASX:DXS).
Note that you're not actually trying to predict long-term bond rates in five or ten years time. Instead, you're merely analysing what effect any changes in interest rates might have on the value of your investment. That is, if you believe a partial or full normalisation of interest rates would lead to capital losses, then perhaps you should move on to another idea.
And my one big prediction for 2017?
That almost every single forecast will prove wrong, with the small minority that don't being due more to luck than any true forecasting skill. By 31 Dec 2017, however, with this years' predictions safely forgotten, the same forecasters will be back to repeat the process.
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