Macroeconomic factors are not good predictors of returns

By on May 14, 2014

Macroeconomic indicators have far less impact on investment returns than many investors think.  Focussing on the future direction of economic variables risks losing sight of the most important predictor of investment returns – the price you pay for the asset in the first place. 

“Changes in factors such as interest rates, GDP growth and exchange rates have little input into how our portfolios are positioned,” says Jan van Niekerk, Chief Executive Officer of RECM. “Research on stock markets around the world has consistently shown that economic variables are extremely poor predictors of investment performance.”

RECM is sceptical about the value that forecasting of economic trends adds to an investment process, says van Niekerk.  “We don’t put any effort into trying to forecast economic variables. There are just too many inputs to consider and we don’t feel anyone can forecast accurately on a consistent basis. We prefer to focus our efforts on things we can control.  We are bottom-up stock pickers, so we work hard to understand the companies we invest in and the intrinsic value of these businesses.”

According to van Niekerk, the most reliable predictor of future returns is the price at which you invest. “The price you pay for an asset is not only completely within your control, but it is also the most dominant driver of investment returns – far more so than changes to economic variables.”

Van Niekerk concludes that there are currently very few quality companies in South Africa trading at a discount.  “In fact the opposite is true – most are trading well above their intrinsic value. Even investing in high quality companies is likely to have a poor outcome if you pay too much for them.”

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