Why blame the Mayans? All of us like forecasts, whether they turn out to be true or not. Every New Year, we all huddle before the television set to tune into predictions from the gurus on a wide range of subjects — from Sensex levels for the year to how our love life will pan out.

In the financial markets, forecasts do not attract attention if they predict that this year will be exactly like the last. That’s why you get some dramatic ones at this time of the year — like the view that this is the year when the American economy will finally collapse. Or that gold will collapse to $1,200 to an ounce. Or that the rupee will miraculously rise to 46 against a dollar. These are genuine 2013 predictions, by the way.

But going by the track record of such forecasts, it is best that you don’t stake too much on these New Year predictions. Look at how some of the January 2012 forecasts ended up.

‘Gold will top $2000’

If you remember, at the beginning of the year, there was a veritable chorus about how global gold prices, after 12 straight years of gains, would soar again in 2012.

Top global names in banking and broking, including UBS, HSBC, Barclays, BNP Paribas and Merrill Lynch, were in unusual agreement that gold prices would top $2,000 an ounce in 2012.

That didn’t happen. Instead, gold spent most of the year trying, without success, to break past $1,800 levels. Global gold prices finally languished at about $1,660 by year-end having notched up just a 6 per cent gain for 2012.

This was despite a supportive market, where global central banks obliged with a QE3 which was much grander and larger in scale than any previous liquidity-infusing exercise.

The problem with forecasting gold prices, or indeed the prices of any commodity, is that there is no fundamental value (based on cash flows or earnings) that can be assigned to a gold bar or a sack of grain.

Unlike equities or even currencies, where there is such a thing as intrinsic value that tethers the market price, commodities have no valuation metrics.

If demand for them exceeds supply, desperate buyers may be willing to buy at any price. And if supplies overwhelm, their prices can tumble like ninepins.

What adds another nice twist to commodity price forecasts is the China factor.

Given that China plays a big role in deciding the demand picture for a range of commodities, how a commodity behaves through the year often depends on how the Chinese economy is faring at the moment. That is a wild card that even best of forecasters have not managed to master.

‘GDP growth at over 7 per cent, inflation below it’

At the beginning of 2012, when the economy was in better shape than today, the forecast was that India would register a real GDP growth of 7.3 per cent in 2012-13.

Forecasters also said that WPI inflation would decline to 6.5 per cent, while the rupee would average 48 to a dollar this fiscal. These were the macro-economic predictions captured in the RBI’s quarterly survey of professional forecasters in January 2012.

By the time the survey was re-done in October, all three forecasts had been turned on their head. GDP growth, as it turned out, had averaged only 5.4 per cent in the first two quarters, prompting a hasty downgrade of the full-year forecast from 7.3 per cent to 5.7 per cent.

Inflation too had refused to tamely subside, prompting an upward revision in this number to 7.7 per cent.

As to the rupee, it didn’t behave as expected either, and the forecast stood revised to 52 to a dollar instead of the original 48.

One can’t really blame the forecasters. One big factor that threw both the GDP and inflation forecasts into disarray was the errant South-West monsoon; it cut the year’s agricultural growth by half. It is however true that no one foresaw the rapid deceleration in industry either.

In fact, a whimsical monsoon has frequently thrown India’s GDP forecasts out of kilter in the past too, because it has seldom panned out as the Indian Meteorological Department calls it in April.

What is expected to be a placid ‘normal monsoon’ year all too often turns to be a drought or a flood year by October, leaving policymakers as well as agri-markets in a tizzy.

‘Sensex company profits will grow by 14 per cent’

If predicting the economy or commodity prices is so fraught with difficulty, how much accuracy can one expect in Sensex predictions, which depend on many other factors?

It is, therefore, hardly surprising that earnings estimates for Sensex companies, so diligently calculated by the Street to the last decimal at the beginning of each fiscal, seldom seem to come good.

In January 2012, the consensus view in the market was that Sensex companies (a proxy for the market) would close the year with a profit growth of 14 per cent for 2012-13, an improvement over 11 per cent growth for the previous year. But after some dismal numbers in the past two quarters, this projection has been quietly revised to a 9 per cent growth.

Now, analysts confidently expect next year’s growth to be 14 per cent! In fact, it is based on the expectation that growth will pick up next year that leading brokers are predicting that the stock market, which soared 25 per cent in 2012, will rise even further next year, with the Sensex closing 2013 at 20,000-23,000 levels.

That could pan out if interest rates fall, commodity prices stay subdued and foreign institutional investors continue their love affair with Indian markets. Those are big ‘ifs’, so going by past experience, it is best not to bet one’s shirt on it. So, this New Year, tune into forecasts by all means, if it amuses you. But if you plan to use them to make investment or career decisions, mid-course corrections to these forecasts through the year will matter far more than what is said in January. Those who take the business of forecasting seriously will provide you with periodic updates to their predictions as events unfold. As for the soothsayers who pop up only during New Year, it is best to treat their statements as a sideshow to the revelries.

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