In late July to early August 2017 we put 20 demanding propositions to you as if you were an Investment Analyst / Economist. We had 154 brave souls who took up the challenge and entered this year’s Wealth Management Investment Competition. They are looking to win bragging rights (and some fantastic prizes) across the Actuarial profession!
The ‘wisdom of actuarial crowds’ for 2017-18
The key messages to the Portfolio Manager for the next financial year based on the majority views from participants were:
- There won’t be a crisis in Greece in 2017-18, so the Greek bond yield will remain below 7%.
- Don’t worry about the iron ore price, it is expected to stay above US$50/t.
- The Japanese economy is not expected to suffer from negative real GDP growth.
- Investment markets are looking fine and investment returns are very likely to be above 5.0%.
- The Japanese 10-yr bond yield is highly likely to remain under 0.20%.
- There’s not much chance of a correction in US equities, with the S&P 500 index expected to remain above 2,400.
- The RBA is likely to raise rates at least once in this financial year.
- Volatility of the Australian equity market is likely to remain modest at under 18.0.
- The Australian 10-yr government bond yield is likely to rise to above 2.75%.
- It is quite unlikely that Australian house prices will fall.
- China is unlikely to see a manufacturing recession, with the PMI holding above 50.0.
- The US unemployment rate is expected to remain below 4.7%.
- The gold price is expected to remain below US$1,400.
- The oil price doesn’t have much chance of rising above US$55.00/bbl.
- The Fed is likely to raise rates at least twice in this financial year.
- Australian inflation-linked bonds will trade to trade up, with a yield of more than 1.30%.
- Melbourne weekend residential auction clearance rates will be above 70% next Autumn.
- The AUD/USD exchange rate won’t see a lot of downside and should remain above 75.0 cents.
- CBA is expected to be a better performer than BHP, but it is a close call.
- It is a tight call on whether the S&P ASX 200 price index will be above or below 6,000 at 30 June 2018.
Scaling factors for each proposition
Each proposition is scaled depending on the responses from participants in the competition, somewhat like a parimutuel betting pool. The scaling factor used for each proposition is: the sum of all ‘yes’ and ‘no’ answers divided by the number of correct answers. Those participants with correct answers for a proposition will be given one point multiplied by that proposition’s scale factor. Incorrect answers will be given a score of zero points. Any ‘unsure’ answers do not affect the scale factor and will be allocated one point for that proposition.
The following table shows the scaling factors for each proposition:
The correlations and other details
The survey had 154 participants, including 17 participants from outside Australia. Each response was unique. Similar to last year, one participant took the ‘index-tracker’ passive option and replied with 20 ‘unsure’ responses. They are now guaranteed to get a ‘market-index’ 20 points. Generally, however, participants were pretty sure about their views, with the average number of ‘unsure’ responses of 1.35, with a median of 0.
Participants were most ‘unsure’ about the Japanese real GDP growth rate and if it would be negative in March 2018, with 20 participants responding as ‘unsure’. The next proposition with the most ‘unsure’ responses was if the Greek 10-year bond yield would be above or below 7.0%. Participants also showed some hesitancy in forecasting the oil price. Participants were least unsure about their views on the Australian 10-year government bond yield and what the RBA will do with cash rates.
The correlations between responses were strongest for the interest rate propositions. There was a 0.56 correlation between the responses for the propositions relating to the Australian 10-yr government bond yield and the inflation linked bond yield; and a 0.28 correlation between the responses for the propositions relating to the Australian 10-yr government bond yield and the RBA cash rate.
Interestingly the strongest positive correlations to the responses to the proposition for the median balanced superannuation fund to return less than 5.0% were the Melbourne auction clearance rates falling below 70%, falling Australian house prices, and a Japanese recession. The strongest negative correlations were to a rising RBA cash rate and to a stronger Australian share market.
The proposition of a fall in the iron ore price had a 0.21 correlation to the proposition that China General Manufacturing PMI would fall below 50.0.
The proposition for a fall in property prices showed a 0.26 correlation with a drop in China General Manufacturing PMI to under 50.0, a 0.31 correlation with a fall in Melbourne auction clearance rates below 70%, a 0.26 correlation with a rise in the S&P ASX 200 VIX index above 18.0, and a negative 0.20 correlation with a rise in the RBA cash rate.
The proposition for Greek 10-yr bond yields to trade above 7.0% was most strongly correlated at 0.23 with the proposition that Japanese 10-year bond yields would rise to above 0.20%.
The responses to the proposition of a sharp rise in the gold price were correlated at 0.21 with the proposition of Melbourne auction clearance rates falling below 70%; and a 0.20 correlation with the proposition that Japanese real GDP growth would be negative.
The two propositions with responses that had no correlation above +/- 0.20 with the responses of any other proposition were that CBA would outperform BHP, and that the oil price would be above US$55.0/bbl.
Bulls and Bears
For the basis of this analysis, and nothing to do with the competition, ‘yes’ responses to each proposition have been assessed as either ‘bullish’ or ‘bearish’. Some are pretty clear, such as if equity markets are to rise, others are more subjective – for example a sharp rise in the gold price was classified as ‘bearish’. Overall, 13 of the ‘yes’ responses to propositions were identified as ‘bearish’ and seven of the ‘yes’ responses to propositions as ‘bullish’.
The participants to the survey were assessed in total as quite ‘bullish’, with a median of five more ‘bullish’ responses than ‘bearish’ responses.
This scatterplot shows the distribution of bearish / bullish responses.
What has happened so far
It is still early stages in the competition, but a few of the majority predictions are looking shaky. Will the RBA really increase cash rates after those retail trade figures? Could the oil price get above $55.00/bbl? It is already pretty close. BHP is off to a flyer relative to CBA. Can CBA fight back? And biggest of all, could Australian house prices actually fall?
The actuarial ‘wisdom of crowds’ did pretty well last year, but can we show that it wasn’t just a fluke? The ‘bears’ have thinned out – maybe after last year’s poor performance, where the ‘bulls’ dominated the prizes. Let’s hope our Portfolio Manager boss hasn’t been sent the wrong message this year, and subsequently will be ‘long and wrong’. It is now just a matter of time waiting to see who of our participants have ‘called it well’ and those who have ‘bombed out’.
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