In the present environment of ‘financial’ awareness and an apparent abundance of firms, economic forecasts flood investors from many sources on a daily basis. The fairness and authenticity of such reports is an entirely different discussion, the more important question is how often this research hits home. In this respect, Fulcrum Asset Management makes some noteworthy conclusions in their own version of research. The discussion is based more on the macro economic forecasts rather than the sell side reports that discuss specific securities. Gavyn Davies, co-founder of Fulcrum, argues that the economic forecasts become increasingly divergent and inaccurate at times when the economy is in recession. The best way to pick the right estimated number is to pool the data and pick the median forecast, which in most cases will be close to the actual. The analysis also states that the value based approach is just another way of making forecasts, it is not an alternative to forecasting.
Fulcrum points out that US equities performed much better than most other markets, more-ever the global equities were up by 14.2 percent while bonds returned 5.7 percent overall. Taking heart from the rounds of monetary easing plans, investors moved to risky assets which resulted in an unpredicted out-performance in equities. Fulcrum’s research also pointed out that stocks are undervalued in comparison to bonds. A couple of days ago, David Tepper made the same conclusion in his interview with CNBC. Tepper predicted that whether there is deal or no-deal on fiscal cliff, the downside to the stock market is still lower than bonds. Fulcrum argues that for further growth, the equity market needs growth in corporate earnings and real improvement in GDP, whereas bonds yields will likely either stay steady or improve.
The current forecasts suggest that economy is at the edge of a significant turning point, in Q4 2012 and going into the next year, the growth rate predictions are higher. The tremors and surprises that resulted in a slowdown of global economy are now events that have been priced into the market so they are unlikely to further contract the growth rates. The current estimates for 2013 also assume that euro crisis will eventually roll back, a possibility that is further strengthened with fiscal union in the Eurozone. As the economy transitions into a new fiscal year, equities have far more potential to improve in value than bonds.