|Summary: The vice-chairman of Blackstone Advisory is predicting a range of economic, financial markets and political surprises for 2013, including a profit margin squeeze and limited revenue growth. Climate change will contribute to another year of crop failures, pushing up food prices and agricultural stocks. The US moves to become independent of Middle East oil imports before 2020.|
|Key take-out: Financial markets will remain volatile, and financial stocks will reverse their 2012 gains.|
|Key beneficiaries: General investors. Category: Portfolio management.|
Now 2012 (along with any lingering fears of the Mayan apocalypse) is safely behind us, it all seems obvious in hindsight.
For one man, however, it all seemed pretty obvious in foresight as well. That man was Byron Wien, currently vice-chairman of major financial and M&A advisory group Blackstone Advisory Partners, who recently released his vaunted list of ‘surprises’ he thinks are likely in 2013. Before getting into them, however, it’s worth taking a look back at what he had to say at the start of 2012, and just how much he got right about the undoubtedly surprising year just past.
Wien got out of the gate strongly last year, and while a quick glance at the 10 surprises of 2012 suggests his predictive powers began to seriously lag toward the end, he still passed his own long-term stated average of 50% with flying colours. So let’s get out the red pen and grade where he went right or wrong in the year that was. (click here to read last year’s)
The first call – that shale oil and gas would begin to be a game changer – took a little while to come to fruition but was confirmed comprehensively by the International Energy Agency report in early November that the US would overtake Saudi Arabia as the world’s largest oil producer by 2017, and Russia’s natural gas production in 2020. Markets took note, and, as to the prediction the price of oil would drift back to $85, it went a little further and bottomed out just below $80, before spending most of the second half of the year in the $80-$95 region. Pretty much spot on.
Call number two was that the S&P 500 would push above 1400 points. It did so in March, before dropping back, hitting it again in August and November to finish the year at 1426.
Wien followed that up with the third prediction: a US economic second wind. He mostly hit the nail on the head there too, helped again late in the game with a revision from the Bureau of Economic Analysis just before Christmas indicating 3.1% ‘real GDP’ growth for the US in the third quarter – just pipping the 3% prediction. Unemployment did dip below 8% as called, and the key consumer confidence indicator was substantially improved on the previous year. Full marks for this one too.
Running hot now, prediction-wise, Wien correctly called the Republican nomination of Mitt Romney, and his subsequent loss to Barack Obama, as well as most of the reasons for it. He missed the Congressional election results, though, and recorded his first stumble.
Quickly recovering, Europe did indeed develop a broad plan across the main agencies and Greece re-structured its debt as predicted. Things did get better across Europe, and while there was no ‘voluntary’ Italian restructure there were plenty of voices calling for one in November. Banks stayed unmelted, and austerity imposed a recession, just as Wien wrote. So far he’s scored about 4.75 out of 5.
The wheels came off a bit in the latter section, starting with the call that the computer would replace conventional armaments as a terrorist weapon. Terrorists, for the most part, stuck with IEDs (improvised explosive devices) over LEDs (light-emitting diodes) and, with banks remaining un-hacked, the world was spared the spectacle of a G-20 IT meeting.
Wien perfectly picked the currency winners of the year, as money supply concerns buoyed the Aussie, the Won, the Singapore dollar and Scandinavian currencies. But optimism may have gotten the better of the next two predictions. The thought of Congress acting early to fix anything because it recognised its own dysfunction would surely have been less a surprise and more a veritable miracle. The deficit deal was eventually manoeuvred, but not technically within the calendar year.
Bashar al-Assad still rules Syria, contrary to surprise number 9, although this may not be the case for much longer. And, finally, nor was it the long-awaited year emerging equity markets broke out – but India did scrape a reasonable year together.
By my rough count that leaves Wien on a score of 6.5 out of 10 for the year, or a very strong pass mark.
So much for the past, below is his 28th iteration of the surprises list. Only time, as always, will tell – but the way time told it last year turned out to be rather similar to Byron Wien.
Byron Wien’s 10 Surprises for 2013:
- Iran announces it has adequate enriched uranium to produce a nuclear-armed missile and the International Atomic Energy Agency confirms the claim. Sanctions, the devaluation of the currency, weak economic conditions and diplomacy did not stop the weapons program. The world must deal with Iran as a nuclear threat rather than talk endlessly about how to prevent the nuclear capability from happening. Both the United States and Israel shift to a policy of containment rather than prevention.
- A profit margin squeeze and limited revenue growth cause 2013 earnings for the Standard & Poor’s 500 to decline, disappointing investors. The S&P 500 trades below 1300. Companies complain of limited pricing power in a slow, highly competitive world economic environment.
- Financial stocks have a rough time, reversing the gains of 2012. Intense competition in commercial and investment banking, together with low trading volumes, puts pressure on profits. Layoffs continue and compensation erodes further. Regulation increases and lawsuits persist as an industry burden.
- In a surprise reversal, the Democrats sponsor a vigorous program to make the United States independent of Middle East oil imports before 2020. The price of West Texas Intermediate crude falls to $70 a barrel. The Administration proposes easing restrictions on hydraulic fracking for oil and gas in less populated areas and allowing more drilling on Federal land. They see energy production, infrastructure and housing as the key job creators in the 2013 economy.
- In another surprise reversal, the Republicans make a major effort to become leaders in immigration policy. They sponsor a bill that paves the way for illegal immigrants to apply for citizenship if they have lived in the United States for a decade, have no criminal record, have a high school education or have served in the military, and can pass an English proficiency test.
- The new leaders in China seem determined to implement reforms to root out corruption, to keep the economy growing at 7% or better and to begin to develop improved health care and retirement programs. The Shanghai Composite finally comes alive and the “A” shares are up more than 20% in 2013, in contrast with the previous year when Chinese stocks were down and some developing markets, notably India, rose.
- Climate change contributes to another year of crop failures, resulting in grain and livestock prices rising significantly. Demand for grains in developing economies continues to increase as the standard of living rises. More investors focus on commodities as an investment opportunity and increase their allocation to this asset class.
- Although inflation remains tame, the price of gold reaches $1,900 an ounce (from $1,682 today) as central bankers everywhere continue to debase their currencies and the financial markets prove treacherous.
- The Japanese economy remains lacklustre and the yen declines to 100 against the dollar. The Nikkei 225 continues the strong advance that began in November and trades above 12,000 as exports improve and investors return to the stocks of the world’s third largest economy.
- The structural problems of Europe remain largely unresolved and the mild recession that began there in 2012 continues. Civil unrest subsides as the weaker countries adjust to austerity. Greece proves successful in implementing policies that reduce wasteful government expenditures and raise revenues from citizens who had been evading taxes. European equities, however, decline 10% in sympathy with the U.S. market.
“Every year there are always a few surprises that do not make the 10 because either I do not believe they are as relevant as those on the basic list or I am not comfortable with the idea that they are ‘probable’. Below are several ‘also rans’ which did not make the Ten Surprises.”
- Having traded below 20 for most of 2012 the VIX Volatility Index surges 33% to 30, providing a bonanza for traders. The decline in the S&P 500 increases market volatility.
- The Newtown, Connecticut, massacre finally convinces Congress to do something about gun control.
- Frustrated by an inability to increase revenues through raising income taxes, Congress begins to consider different approaches. There is more talk of a value-added tax as well as a wealth tax, and these ideas appear to be slowly gathering momentum.
- Congress decides that high-frequency and other computerized algorithmic-based trading practices are putting the individual investor at a disadvantage. A transaction fee designed to slow down frenetic activity and protect against “flash crashes” and glitches is imposed on intra-day trades.
- The planet finds itself saturated with technology. Semiconductor companies, software providers, social media favourites and personal computer manufacturers all report disappointing earnings and provide discouraging guidance. They lead the overall market lower. Users finally agree the present state of the art is fast enough and connected enough, and that they have more “apps” than they know what to do with. Apple bucks the trend and trades above $700 as its products continue to enjoy enormous success abroad.