Johannesburg - Forecasts of movements in the value of the rand, interest rates and the gold price are useless indicators on which to build an investment strategy.
Nic Andrew, the head of Nedgroup Investments, said these variables could lead to interesting discussions, but it was unlikely that forecasts would be correct and or of value to an investment.
From American economists’ forecasts on the movements in interest rates it is clear that over the past 25 years adjustments in interest rates were correctly predicted only in one out of three cases.
From research published in the Financial Analysts Journal, it is evident that even earnings forecasts are not always accurate.
From an analysis of 240 000 earnings forecasts, there is a 50% difference between the forecasts and what companies achieved.
Andrew said that against the background of share prices being able to fluctuate seriously if earnings deviated 5% to 10% from expectations, the big difference between forecasts and reality could have a significant effect.
If the same analysis is done on the earnings of South African companies and forecasts since 1960, in successive seven-year periods they corresponded in only 14% of cases.
From the analysis of economic growth in emerging countries and the real returns on shares, there appears to be a negative relationship between economic growth and returns on the share markets.
Although the different economic variables receive a lot of attention, they are not in fact a good indication of future returns.
Investment decisions should, according to Andrew, be based rather on variables that can be calculated with greater certainty, and whose effect on future unions has already been demonstrated. This amounts to the value that a certain asset offers at a particular time, and buying it at a particular discount to its value.
The best tools for doing so are, according to Andrew, the price/earnings multiple and the dividend yield. The relationship between these variables and returns is much greater than that between yields and economic indicators.
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