Economic forecasting - the lure of false precision

Brunel’s David Vickers looks ahead to possible investment trends in 2023 and beyond

Professional Pensions
clock • 2 min read
Economic forecasting - the lure of false precision

Forward-looking portfolio returns are likely to improve as most major asset classes adjust to the new world of higher inflation, Brunel Pension Partnership’s David Vickers says.

In a video posted on Brunel Pension Partnership's website on Friday (6 January), the pool's chief investment officer David Vickers said this was the time of year that the investment industry published its 12 month asset forecasts.

Before making his own forecast, Vickers warned that, looking back at last year in particular, analysts had been quite a way out in their predictions - particularly in US equity markets, where those predicting the S&P500 would finish 2022 at a level above 5,000 had been very much out of kilter with the reality of a year-end index figure of around 3,850.

Vickers said that, while most of these predictions had been made before the invasion of Ukraine and the rampant inflation and interest rate rises seen during the year - it certainly "gave credibility to [economist] John Kenneth Galbraith's view that the only purpose of economic forecasting is to make astrology look credible".

He said: "Point-based forecasting is often a futile pursuit, and a false precision can lead to many issues, especially when a whole portfolio is boiled down, via a strategic asset allocation, to a single risk and return number."

Despite this, Vickers said forecasting a range of outcomes based on varying scenarios and probabilities was useful for investors.

He said: "This framework sets the right tone for a good investment conversation in so much as it explicitly recognises that there is more than one plausible outcome. It also helps guide expectations and can highlight where the risks are and what the consequences of those risks could be."

And he cautiously suggested that such analysis pointed towards improving forward-looking returns.

He said: "With higher certainty, I can say that most major asset classes have begun to adjust to the new world of higher inflation via falling prices, which all else being equal improves the forward-looking returns of your portfolio.

"Am I brave enough to suggest that those returns will manifest in the next 12 months - I'm afraid not, but actually with a longer time horizon, my conviction would certainly increase."

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