“A good forecaster is not smarter than everyone else, he merely has his ignorance better organised.”

— Anonymous

In January of last year I laid out 12 unexpected events or surprise situations that were, at the time, outside of the conventional consensus opinion that I felt had a reasonable chance of occurring (http://www.royalgazette.com/article/20140114/COLUMN05/140119906). Let’s go back and take a look at how these “surprises” panned out:

1 The Bermuda economy grows! It’s too early to officially tell but it looks like I was too optimistic here. After having a somewhat more solid start to 2014, the back half of the year looks like it deteriorated a bit. Growth for 2014 is likely to come in slightly negative to flat for 2014 and not at the 1% figure I expected.

Score: 0/1

2 A Canadian bank opens shop in Bermuda. The call was for the consumption and finalisation of the CIBC buying out Carlyle’s stake in the Bank of Butterfield. Although the deal didn’t materialise (I suspect they are waiting for rates to rise and the stigma attached to the First Caribbean write-off to wane before final consummation) the Butterfield buy recommendation worked wonderfully. NTB offered a total return of about 38 per cent for 2014.

Score: 1/2

3 P&C merger mania. Specifically the surprise suggested, “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 …. Look for at least two local Bermuda reinsurers to be bought or merge in 2014.” This has happened and appears to be accelerating somewhat. RenaissanceRe bought Platinum and Montpelier Re Holdings is on the block. On December 18, XL also announced intentions to buy Catlin Group Ltd. The Endurance and Aspen deal was shelved but I would assume something will eventually happen for both as well.

Score: 2/3

4 Oh, oh Canada. The call was for weakness to begin to show in Canada as a result of, “Massive household leverage, an uninspiring commodity market”. As a result the trade was to short the Canadian dollar. The commodity market stumbled (especially energy) and forecasts have begun to drift lower. The trade was to short the CurrencyShares Canadian Dollar Trust (Ticker: FXC) which fell about nine per cent for the year.

Score: 3/4

5 Emerging markets fail to emerge. Specifically I suggested, “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 … Developed markets may be set to outperformed developing markets again.” The call was correct but the trade was not. iShares MSCI Emerging Markets ETF actually ended the year down about four per cent but instead I was more selective and suggested to 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). Except for Brazil and South Africa all these markets actually performed well in 2014. In good conscience, I cannot take a point here.

Score: 3/5

6 Commodities are uninspiring. If anything this may have been one of the biggest surprises. The economists surveyed by the Journal expected oil to end 2014 at about $95 a barrel. I suggested, “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 per cent.” The trade was to sell the S&P GS Commodity Index which fell about 34 per cent in 2014.

Score: 4/6

7 Deflation arrives. Did anyone expect deflation to arrive in 2014? The surprise called for this to materialise after taking into account various aspects that many pundits seemed to be ignoring at the time: 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. Calls for inflation over the last few years have been consistently wrong mainly because they have been backed with faulty thinking on how monetary systems work and how the fractional banking system operates. The call was “the euro-area dips near deflationary territory at some point which forces the ECB to get more accommodative”. Well deflation did arrive in the Eurozone which just printed a -0.2 per cent rate for December. Buying euro bonds hedged to dollars gave you an 11 per cent return (The BofA Merrill Lynch Euro Broad Market Index) and shorting the euro netted you a roughly 12 per cent return.

Score: 5/7

8 Rates in the US flat line. In The Wall Street Journal’s January 2014 economic forecasting survey 48 of the 49 participating business economists expected the yield on the ten-year Treasury note, about 2.9 per cent around the time of the survey, to exceed three per cent by year-end, with an average forecast of 3.52 per cent. My surprise was for rates to remain virtually where they were and to fade expectations for yield to climb. If you followed the trade idea to buy the iShares 20+ Year Treasury Bond ETF (Ticker: TLT) you netted a nearly 27 per cent gain.

Score: 6/8

9 Munis are marvellous. The surprise was to fade the negative headlines on Detroit and Puerto Rico and realise that the broader Muni market was in good shape and in fact there was “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.” Buying the Nuveen Select Quality Municipal Fund (Ticker: NQS) pleasantly surprised holders with a 19 per cent return.

Score: 7/9

10 REITS rock. The contrarian surprise assumed yields would not rocket higher and REITS would outperform the market. Buying the Vanguard REIT ETF (Ticker: VNQ), as suggested, netted a nice 30 per cent gain for the year.

Score: 8/10

11 H7N9 Outbreak resurfaces in Asia. The call was that “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.” The irony here, of course, is it wasn’t H7N9 that erupted as an epidemic, it was Ebola. In fact fears of Ebola scared investors into knocking stocks down by almost ten per cent from September to mid-October. Buying hazmat suit and N95 respirator would have been helpful in some countries in Africa but the surprise disease was a surprise.

Score: 8/11

12 S&P Consensus is right! The call was for the S&P to rise to consensus estimates. At the time they suggested a gain of about six per cent. This, of course, was walked up through the year and ended near where the market finished. Ultimately, the call was stay long the S&P 500 despite the banner year of 2013. Holding the SPDR S&P 500 (Ticker: SPY) surprised even strategists with a greater than 13 per cent return.

Score: 9/12

Overall about 75 per cent of the forecasted surprises came to pass for 2014 (up from the 70 per cent hit rate in 2013 and in line with 2012 75 per cent success rate). Much higher than I would have anticipated given the nature of some of these calls.

In the next week or so I hope to have my “surprises” for 2015.

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.

Nathan Kowalski is the chief financial officer of Anchor Investment Management Ltd and the views expressed are his own.