T N Ninan: Better ask the parrot

It may be time to look at the market forecasts that pundits had made earlier

When there is blood on trading screens, and holes in investors' pockets, it may be time for relief in the form of some dark humour—by looking at the market forecasts that pundits had made. For instance, no one would want to be in the shoes of Nomura’s “chief equity strategist” who forecast as recently as October that the Sensex would be at 33,500 in early 2016. Or in the shoes of the almost equally optimistic forecasters in Citibank, Deutsche Bank and Morgan Stanley who, caught up in the upbeat mood that prevailed during the early stages of the Modi government, forecast that the Sensex would be at 32,500-33,000 by December 2015.

Outlandish as these forecasts seem now, in the light of disillusioning reality, they were not the outliers; indeed, they represented the mainstream view. A Reuters poll last March had equity analysts forecasting a Sensex level of 32,000 at the end of 2015. It is not that China’s structural problems weren’t known at the time, or that monetary policies in the leading economies were not potential sources of instability—factors that had foreign portfolio investors begin to pull out their money and head for safe harbour elsewhere. Three months later, in June, these issues had begun to register more clearly and the forecasters whom Reuters polled dropped their December number to 27,500. As we now know, even that was too optimistic. Still, it is an old rule that as the target date for the forecast moves further into the future, optimism climbs; so the poll had analysts looking at a Sensex level of 29,000 by June 2016. From the perspective of about 24,400 this week-end, that seems like a leap of faith.

In contrast, two stalwarts who feature regularly on the business channels made room for caution, though both have been generally upbeat in a down market. Raamdeo Agrawal, speaking after the market shocks of August, said that the Nifty (which fell by about 900 points in the course of August, to 7,655) was not likely to fall much further. The second pundit, Ramesh Damani, spoke in June about the second phase of a bull market, but hedged by saying that you could have a 15-20 per cent correction even in a bull market. He noted that there had already been a 10-12 per cent correction, leaving room for a further small correction. Eventually, the market drop has been somewhat more than either would have expected.

You could argue that many pundits have a vested interest in boosterism, given that asset managers benefit when investors flock in. But take a look at that other priesthood, in the International Monetary Fund: the people who make forecasts every quarter about the world economy and individual countries. Year after year in recent years, the forecasts have proved too optimistic. In January 2010, the growth forecast for 2011 was 4.3 per cent; the year eventually delivered 3.8 per cent. A year later, the forecast for 2012 was an even more optimistic 4.5 per cent; reality went the other way and delivered a weaker 3.2 per cent. And so on; for the past five years, IMF’s average growth forecast for the year following the one just begun was 4.1 per cent; the reality has been 3.3 per cent. Five times bitten and finally a little shy, the hardy optimists in Washington have become more careful, though the tendency still is to be progressively optimistic: the forecast for 2016 is a small uptick to 3.4 per cent (from 3.1 per cent in 2015), and for 2017 a more upbeat 3.6 per cent. This at a time when China, which accounts for close to one-seventh of world gross domestic product or GDP, is slowing dramatically. Any bets on whether our street-side parrots would do better?