“Never make predictions, especially about the future”

— Casey Stengel

“Every year I talk to the executives of a thousand companies, and I can’t avoid hearing from the various gold bugs, interest-rate disciples, Federal Reserve watchers, and fiscal mystics quoted in the newspapers. Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”

— Peter Lynch from One Up on Wall Street

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 to assess their value and likelihood of various scenarios, than burning hours pondering the direction of markets. Finding great investments often does not depend on guesses about the economy, interest rates, etc. 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 pundits and their forecasts. Many famous forecasters are simply guys/gals who have gotten one prediction right in a row.

I’ve said this in all my prior surprise columns and I’ll say it again; static forecasting is junk. Situations in financial markets are fluid, thus all prognostications are almost instantly stale. Trying to guess what the market will do next is like trying to nail Jell-O to a tree. 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.

Voltaire sums it up best: “Doubt is not a pleasant condition, but certainty is absurd.” Besides, successful investing involves following the right principals 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 that I think actually do have a chance of happening but are not really expected because they are under-recognised probabilities or very contrarian. 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). It’s worth noting that this year has felt like one the most difficult years to collate surprises. The world appears to me to be in a major transitory state full of dichotomy and dissenting macro forces. This would suggest my confidence in these surprises is very low. To be clear, what follows is NOT an investment strategy or outright forecast but a list of potential surprises for 2016:

1. Sunny with a Chance of Showers. Bermuda’s economy downshifts but remains positive for the year. Growth in 2016 is less than 2015 on the back of a tough comparison. Retail sales turn after strong growth in 2015 that was led by surging auto sales. A number of months roll over to the negative side.

A new hospitality project aids the construction sector offsetting some weakness in the insurance industry from ongoing optimisation and the lack of a major America’s Cup event. At least one additional merger or acquisition in the reinsurance space continues the trend of consolidation. Increased taxes and further fiscal consolidation from the government curb some investment and growth. Look for one or maybe two quarters of negative GDP in 2016. A lower average inflation rate helps real growth. The nation begins a serious conversation on a “living wage” as inequality concerns escalate.

Strategy: None

2. BSX Bounce. The recent Butterfield acquisition of HSBC assets bolsters earnings. Discussion begins on an alternative exchange listing as Carlyle prepares its final exit. Belco gets a favourable regulated rate ruling which helps to alleviate profitability concerns.

Strategy: Buy BSX companies.

3. Leap Frogging Unicorns. When you play leap frog with a unicorn eventually there is a very big negative outcome. The unicorns (private companies valued in excess of $1 billion) are about to get a reality check. Fidelity has started the revalue process with its recent writedown of its Snapchat stake by 25 per cent. Private market valuations will converge lower towards public multiples. IPOs will simply not be able to be priced at venture capital (VC) funding levels and valuations will plummet.

Strategy: Avoid/sell private equity holdings of inflated tech start-ups.

4. The Federal Reserve Reconsiders. The Fed continues to make noises about “normalising” monetary policy, but ends up doing virtually nothing again in 2016. At most, there is a single 0.25 per cent rate hike for 2016. The massive global manufacturing recession counters much of the strength in the service sector. Nations like Australia and Canada enter deeper recessions — property prices decline. The chance of a recession begins to tick-up in the US and is not zero.

Strategy: None

5. Sovereign Debt Yields Remain Low. US Treasury yields defy the majority view again which suggests they rise. More specifically, the yield-curve flattens even after considering a much more muted Federal Reserve hiking cycle. The downshift in global growth will likely curb investment and thus expand global savings. In fact global growth could surprise to the downside and fall below 3 per cent for 2016. China’s transition from fixed investment to a consumption driven economy stumbles and growth misses their “manufactured” estimate of 6.5 per cent. Shadow figures suggest growth below 6 per cent. Emerging market weakness and the US competitive yield advantage drive flows to the US Treasury market. Profiting from higher yields in the US becomes the second time the term the “widow maker” trade is used (the first being Japan).

Strategy: Buy iShares 20+ Year Treasury ETF (Ticker: TLT)

6. Democratic Sweep. Donald Trump mounts a stellar campaign but fails to capture the Republican nomination. Ted Cruz squares off with Hillary Clinton but loses by a landslide margin as frustrated Millennials vote for a more left government that pushes more for the “average Joe”. The American people shun the fracturing Republican Party which begins somewhat of its own civil war and the Democrats retake the house. Before he leaves, Obama closes Guantánamo Bay and finally forces through tighter gun laws.

Strategy: None.

7. US Stocks End Negative. Strategists estimate the S&P 500 will end up above 2,300 or about 12 per cent for 2016. However, high multiples, peak profit margins and weak earnings growth on the back of soft pricing power causes a sell-off in US equities. There will be little help from some underlying structural aspects as well. Rock bottom interest rates have caused a record surge in the margin debt to gross domestic product ratio at the NYSE. Buy-backs have recently been in excess of free cash flow in aggregate and mergers and acquisitions looked to have peaked after hitting a new 10 year high. Selling will beget selling at some point even if economic fundamentals are not so dire. Stocks may enter a bear market at some point in 2016.

Strategy: Short or avoid the Nasdaq 100 Index (Ticker: QQQ)

8. Bricks over Clicks. Despite Amazon’s impressive growth and clear dominance in the online space, its nosebleed valuation drags down its return for the year. Traditional brick retailers who have been devastated in 2015 regain relative performance on the back of footprint rationalisation, private equity bids, activist investors and depressed valuations.

Strategy: Buy a “Bricks Basket” of Nordstrom (Ticker: JWN), Macy’s (Ticker: M), and Wal-Mart (Ticker: WMT) while selling the “Clicks Basket” of AMZN (Ticker: AMZN), eBay (Ticker: EBAY) and Overstock (Ticker: OSTK).

9. Dollar Dithers. One of the most crowded trades is being long the US dollar. On a trade-weighted basis the dollar is 15 per cent overvalued relative to its Purchasing Power Parity exchange rate. In four of the last five Fed rate hike cycles, the US dollar actually peaked near the first hike. Europe is running a large current account surplus and its weaker inflation should, in macroeconomic theory anyway, mean a stronger currency not a weaker one. The yen gets a “safe-haven” bid on the reversal of carry-trades with turmoil in global markets. Asian currencies wobble on falling global trade and the attempt by countries to depreciate to bolster market share of a shrinking global export market which China continues to dominate. The pound initially falls with fears of a “Brexit” as Euro-sceptics surge in popularity over concerns regarding immigration.

Strategy: Basket currency trade of long euro, yen, and short Korean won, Malaysian Ringgit and Chinese yuan. Trade the pound short into the referendum.

10. No More Cheap Eats. Agricultural commodities outperform as El Niño wreaks havoc in the global weather system. Droughts ensue pushing up crop prices. The world also realises they are not eating any less than last year.

Strategy: Long Rogers International Commodity Index — Agriculture (Ticker: RJA)

11. Value over Growth. Over the past five years, growth investing has outperformed value investing by more than 17 per cent or more than 2.5 per cent per annum. Typically value investing actually outperforms growth investing by about 2 per cent per annum. This may be the year of mean-reversion as “story stocks” underperform more stable businesses with lower valuations.

Strategy: Buy iShares Russell 2000 Value ETF (Ticker: IWN) and sell iShares Russell 2000 Growth ETF (Ticker: IWO).

12. OPEC Turmoil. Crude collapses under the weight of huge supply initially but then turns. Plunging oil prices cause social unrest in OPEC nations. Cut backs in fuel subsidies and other social welfare programmes lead to revolt among the populace. Venezuela becomes unhinged. Geopolitical tensions rise throughout 2016 and a risk premium reasserts itself. Saudi Arabia throws in the towel and “suggests” they will cut production. Multiple bankruptcies in the oil patch help to rapidly reduce the supply balance. Crude ends the year in positive territory even after plunging 30% initially.

Strategy: Sell WTI crude to near $25 then go long.

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. Mr Kowalski and/or clients of Anchor Investment Management Ltd. may hold positions mentioned in this writing.