Forecast for 2013: stock market forecasts will be wrong

Stocks

Investors sifting through analysts' new year predictions for stock market movements may want to press "delete" and look instead for sound companies, as history shows equity index forecasts are usually wrong.

In good years and bad, according to Reuters polls, most fund managers and analysts have struggled to predict annual moves in the main European stock markets, underestimating rallies and missing crashes.

According to data from Lipper, a Thomson Reuters company, the 11 best-performing European equity funds over the past 15 years all employed so-called bottom-up strategies, investing in individual companies with strong fundamentals rather than betting the whole market will rise or fall.

These top funds saw their value grow between 150 percent and 500 percent over the period, compared to 53 percent growth on average for the 290 funds polled.

"Looking at the macro economic environment helps you understand where better to allocate your time and shine your torch, but I don't spend much time looking at forecasts for indices," said Feras Al-Chalabi, whose continental European equity fund at Odey Asset Management came second in Lipper's ranking since 1997.

The problem is that fund managers, even at brainy hedge funds, seem to miss the unexpected political or economic upheavals that cause wrenching rises or falls in markets.

Some of these might be regarded as events that no one could reasonably have predicted but missing them plays havoc with forecasts. Instead, forecasters appear to base their predictions on equities' long-term average performance and the belief that stocks generally will tend to rise over time.

"When you ask people for their predictions, that's driving them towards the most likely outcome and that's removing them from the ability to think about extreme scenarios," said Greg Davies, head of behavioural and quantitative finance at Barclays Wealth.

The median year-end forecast for Britain's FTSE and Germany's Dax indexes has been on average 8.7 percent and 14.4 percent too high, respectively, since 1997, historical Reuters survey data showed.

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