One of the more popular posts on this site in December carried the headline “Goldman Predictions No Better Than Coin Flip, Bank Admits.”
In that rather amusing piece, I catalogued eight macro predictions Goldman made for 2016 and presented the bank’s own analysis of how those predictions fared. The results: 4 correct, 3 incorrect, and 1 inconclusive.
In other words: statistically speaking, you would have likely done just as well with a coin flip.
That’s not particularly surprising. Macro forecasting is notoriously difficult and as I noted earlier this week, “there’s always been a kind of pall hanging over the business of making macro predictions [and] indeed it’s not uncommon for market watchers to declare that the only people worse at their jobs than weathermen are economists.” I continued:
We should probably give the global macro guys a bit of a break. Why? Well because contrary to popular belief, there’s a lot of luck involved in making any kind of predictions about markets.
Well, on Friday morning, Goldman is out with a similar analysis of the bank’s EM predictions for the year. This time around, Goldman has eschewed the term “incorrect” for the better-sounding “mostly correct” and “partially” correct.
Q1. After a difficult 2015, will EM growth improve in 2016?
Our answer: Yes, but well below trend.
Verdict: Incorrect. At the beginning of the year, we expected a modest pick-up in aggregate EM growth for 2016. While the bumpy deceleration in China was to continue, we had expected moderate improvement in India, a recovery in Russia, and a slower pace of contraction for Brazil.
Looking back at 2016, although growth did improve for some EMs, the pick-up was more muted than previously thought and predominantly below trend.
Q2. Will EM inflation pick up in 2016?
Our answer: Yes. We expect inflation to increase gradually in most EMs.
Verdict: Mostly correct. Relative to end of last year, inflation accelerated in most of low-yielders across geographies, and decelerated sharply in Russia and Brazil, in line with our expectations. Parts of the “squeezed middle” (places where stagflationary symptoms complicate policy choices), such as India and Colombia, also saw a decline in inflation, which allowed respective central banks to assume a somewhat more dovish stance. Overall, headline year-on-year inflation increased in more places than declined, leading to a marginal overall increase in the average ex Brazil and Russia.
Q3. Will we see EM FX depreciation again in 2016?
Our answer: Yes, but it should be less intense relative to the past three years as a growing number of EM currencies exhibit stability; China (and CNY) linked currencies are most vulnerable.
Verdict: Partially correct. Our proposition that EM FX would (on average) depreciate but less than in 2015 was largely correct. After three years of sharp (5%+) depreciation of EM FX against the dollar, 2016 has seen only very marginal depreciation so far (largely flat), enabling investors to reap positive annual total return (including carry) for the first time since 2012.
Q4. Will EM equity record another year of negative return?
Our answer: No, most EM equity markets should rise in local terms, but the EM aggregate in USD will be roughly flat for the year.
Verdict: Partially correct. Coming into 2016, we had expected EM equities to perform worse at the start of the year as EM moves ‘towards the trough’ amid China risks and low commodity prices. However, EM equities should find a bottom in 1H as growth improves and prospects brighten.
The EM equity rally this year began earlier than we had anticipated. Equity markets started to rally at the end of January, and while we were correct to predict a positive year-end return in local currency (MSCI EM in local terms has generated roughly 6% YTD), the furious rally in EM FX that buoyed equity performances was less expected. As a result, EM aggregate also performed well in USD terms.
So I suppose our coin flip analogy doesn’t apply here. After all, there’s no such thing as “partially heads” or “mostly tails.”