“While doctors might be able to advise patients about their general health, they could not determine whether a healthy patient would be struck by a brick upon leaving the hospital.” — in “Fortune Tellers” by Walter Friedman

“As I think back over the years, I have been guided by four principles for decision making. First, the only certainty is that there is no certainty. Second, every decision, as a consequence, is a matter of weighing probabilities. Third, despite uncertainty we must decide and we must act. And lastly, we need to judge decisions not only on the results, but on how they were made. Most people are in denial about uncertainty. They assume they’re lucky, and that the unpredictable can be reliably forecast. This keeps business brisk for palm readers, psychics, and stockbrokers, but it’s a terrible way to deal with uncertainty. If there are no absolutes, then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each. Then, on that basis, you can make a good decision.” — Robert Rubin, former Secretary of the US Treasury

I’m pretty sceptical about the predictive power of most things, especially when it comes to any aspects that involve human emotion or a collective social conscious. Personally, I prefer to study businesses and companies and assess their value and likelihood of various scenarios than burn hours pondering the direction of markets.

January is the month where almost everyone in my industry has an opinion. To be right in predicting, the saying goes, is to predict often. In fact it’s hard to know how well many prognosticators do because their “predictions” are constantly changing.

For the most part, however, it’s your job as an investor to ignore people and their forecasts. I’ve said this in all prior surprise columns and I’ll say it again; forecasting is pretty much junk. Situations in financial markets are fluid, thus all prognostications are almost instantly stale. No one can truly claim with certainty that they know what tomorrow will bring and if you meet someone who does you should put your hands in your pockets to check for your wallet and slowly back away.

It was not only the financial leaders and economists that failed to see the financial crisis (housing bust/recession) coming, but leading investors as well. The Federal Reserve has some 450 economists (many Ph.Ds) working full time trying to peg what the economy will do and they have an amazingly poor track record.

Voltaire sums it up best: “Doubt is not a pleasant condition, but certainty is absurd.” Besides, successful investing involves following the right principles not the right predictions.

The term ‘surprise’ means an unexpected event that is currently an out-of-consensus view. I have tried to list a few outcomes I think actually do have a chance of happening but are not really expected because they are under-recognised probabilities. I have written these in the spirit of nudging the reader to look “outside-the-box” and consider a disparate view of things that may cause some cognitive dissonance. I also have included investment vehicles or strategies where appropriate to track aspects of these calls (see important disclaimer at the end). To be clear, what follows is NOT an investment strategy but a list of potential surprises for 2014:

1. The Bermuda Economy Grows! After five years of contraction, Bermuda GDP finally posts a positive figure. Don’t expect a huge number here but I believe we are hitting a “statistical bottom”. Growth comes in near one percent.

Strategy: None

2. A Canadian Bank Opens Shop in Bermuda. I think you all know what I’m referring to. It’s now been five years since the Carlyle and CIBC buyout of Butterflied. Typically private equity firms have a five-year time horizon for exit strategies. I think there are good odds that CIBC formally takes over. If only the two sides could agree on a price….

Strategy: Buy Bank of Butterfield (Ticker: NTB BH)

3. P&C Merger Mania. Excess capital, low pricing leverage, and limited options for organic growth drive numerous mid-sized and small P&C companies to merge or be acquired. The massive influx of alternative capital into the insurance space is pretty much forcing the need for tighter cost control and bigger economies of scale for the traditional reinsurers. Consolidation will help rationalise the industry and control cost. Share repurchases on values over book value looks to have slowed so mergers may add a source for growth. Look for at least two local Bermuda reinsurers to be bought or merge in 2014.

Strategy: None

4. Oh Oh Canada. Massive household leverage, an uninspiring commodity market and a resultant softening economy forces the Bank of Canada to become more accommodative. Household leverage in Canada is now over 163 percent to disposable income, higher than the US peak (131 percent) or the UK peak (161 percent) before private sector deleveraging commenced. This deleveraging process combined with anaemic wage growth forces an economic slowdown to the point where the economy flirts with recession. The “loonie” heads south falling to levels of 1.18 at some point.

Strategy: Short the Canadian dollar or short CurrencyShares Canadian Dollar Trust (Ticker: FXC)

5. Emerging Markets fail to emerge. Most pundits point to the fact that emerging markets are cheap. Profitability, however, within the emerging markets has been undermined by low productivity and a less developed free market environment. Hyperbolic credit creation in China, for example, has escalated at the same time corporate fundamentals in China are weakening. Ironically, the Chinese corporate sector is now one of the most levered in the world, and yet its marginal return on investment is going down. So the efficiency of that economy’s credit is getting lower and lower and returns from leverage are dropping. That’s not really healthy and limits the growth story somewhat. The weaker link is probably the “BIITS” (Brazil, India, Indonesia, Turkey and South Africa). These are large emerging markets with significant current account deficits. When liquidity flows back to the US these currencies get killed — they did on the last “taper tantrum”. Commodities are not likely to help either. Developed markets may be set to outperformed developing markets again.

Strategy: Sell (avoid) BIITS emerging markets or iShares Brazil (Ticker: EWZ), iShares MSCI Indonesia (Ticker: EIDO), iShares MSCI India Index (Ticker: INDIA), iShares MSCI Turkey (Ticker: TUR), and iShares MSCI South Africa (Ticker: EZA).

6. Commodities are uninspiring. Global resynchronised growth will fail to bolster commodity prices as many expect. The secular bull market in commodities is over. The massive supply response, burgeoning US dollar strength and shifting Chinese economic focus are headwinds to any serious price escalation. Non-OPEC oil supplies are estimated to rise some 1.5 million barrels per day. There is the potential, as well, for two million more from Libya and the end of sanctions in Iran. The shale-oil boom accelerates and North America becomes awash in oil. Commodities drop by more than ten percent.

Strategy: Sell commodities or S&P GS Commodity Index.

7. Deflation Arrives. There are many ongoing and persistent deflationary forces in the world. These include falling or stagnant commodity prices, ageing and declining populations in certain developed economies, economic output that is well below potential, globalisation of production, growing worldwide protectionism including competitive devaluations of currencies, declining real incomes, widening inequality, declining overall union membership, higher and persistent unemployment and continued downward pressure on federal, state and local government spending. Consensus sees inflation because of easy money but easy money does not equal inflation (just ask the Japanese). The euro-area dips near deflationary territory at some point which forces the ECB to get more accommodative.

Strategy: Go long European bonds hedged to US dollars or simply short the Euro.

8. Rates in the US flat line. If there is a consensus out there it is that US rates are set to rise. The high estimate is for the ten-year to reach nearly four percent by year end. The average estimate is for yields to settle near 3.5 percent by the end of 2014. Deflationary pressures as noted above plus growth near three percent help cap rates. The surprise would be that rates remain virtually where they began — near three percent by the end of 2014.

Strategy: Play the “roll” and buy long dated bonds like iShares 20+ Year Treasury Bond ETF (Ticker: TLT)

9. Munis are marvellous. Detroit and Puerto Rico may dominate headlines but they are not really indicative of the overall municipal bond market. Many states are actually in better shape than they were prior to the 2008 financial crisis. They have learned some tough lessons on balancing budgets and have enacted much austerity. There appears to be good value in Munis (especially closed-end finds where they trade much below the average discounts to net asset value). Look for munis to bounce and offer gains in some of these closed-end funds of low double digits.

Strategy: Buy Nuveen Select Quality Municipal Fund (Ticker: NQS)

10. REITS rock. When the Fed hinted on tapering in May of 2013, everything perceived to be interest rate sensitive got destroyed. Since then REITS have gone nowhere while the market has soared. The contrarian play would assume yields will not rocket from here and REITS should outperform. In fact REITS have and can rally even in the face of rising rates. Buy the forgotten sector and look for REITS to outperform the market this year.

Strategy: Buy REITS, or the Vanguard REIT ETF (Ticker: VNQ).

11. H7N9 Outbreak resurfaces in Asia. According to the CDC, “Human infections with a new avian influenza A (H7N9) virus were first reported in China in March 2013. Most of these infections are believed to result from exposure to infected poultry or contaminated environments, as H7N9 viruses have also been found in poultry in China... Most concerning about this situation is the pandemic potential of this virus. Influenza viruses constantly change and it’s possible that this virus could gain the ability to spread easily and sustainably among people, triggering a global outbreak of disease (pandemic).” 2014 could be the year the world scrambles for a vaccine as this deadly flu begins a small panic. Infections escalate to levels justifying a warning. I am not forecasting that it mutates so far as being transmitted human to human... that is simply too scary to ponder.

Strategy: None, except maybe invest in a N95 respirator.

12. S&P 500 Consensus is right! This would definitely be a surprise. Often target prices are off considerably in either direction. Imagine if Wall Street pegged it right! The S&P ends the year near the current median estimate of 1,950 or up about six percent. This will happen despite a correction of around ten percent at some point in the year.

Strategy: Stay long the S&P 500, or buy SPDR S&P 500 (Ticker: SPY)

Nathan Kowalski is the CFO of Anchor Investment Management and the views expressed are his own.

Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisers prior to any investment decision. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.