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| Financial and market forecasts from year to year are often way off base, but investors demand guidance at the beginning of each new year. |
In any
given year, it is a difficult and sometimes meaningless exercise to present New
Year's forecasts of financial markets and activity. Pundits, analysts and
the media attempt to do so anyway and then realize 12 months later how far off
they are from their projections.
They try
to predict market behavior and market volatility. They try to predict new
products and trends in the marketplace. Some try to predict which firms,
financial institutions or companies will rise above all others in performance
or stature.
In fact,
just weeks ago, who could have projected the focus of global attention would
have transitioned from trade tensions in China and protests on the streets in
Hong Kong to a renewed U.S.-Iran standoff?
Yet
investors and other financial stakeholders push for forecasts. They seek
guidance on how to manage risks, portfolios or trading positions. They
seek reinforcement of their own views of where they think the market is headed
or what activities we expect to see in capital markets.
The year
unfolds, and then we observe markets going in unexpected directions. Or we
observe events or trends no one had any idea was forthcoming. Over a year
ago, market analysts predicted increases in interest rates, and investment
managers braced for the subsequent impact on fixed-income portfolios. A
year later, market analysts and policy makers turned course and projected interest
rates would decline. After a tumultuous stock-market year in 2018, which
led to losses in most indices around the world, investors prepared for an
unimpressive 2019. And then equity markets soared (although there were the
usual periods of intolerable volatility).
A year
ago investors and bankers salivated with glee anticipating the IPO of
WeWork. A year later, sentiments about the company have soured, while an
IPO has been postponed indefinitely. The fervor about a WeWork public
offering has turned into concern about how the IPO market should work
going forward (and about the specific roles of the banks that bring new
companies to the public markets).
Initial Public Offerings
Will the WeWork debacle slow down the new-issues market and spur banks to
overhaul the process of taking a company public? Will the debacle alter the
traditional timetables of taking a new venture public? Will companies be forced
to prove more definitively the plan to achieve sustainable profitability?
Because
investors want more certainty about when a new company will generate positive
operating cash flows, will companies postpone for longer periods the calendar
to go public? What should or what will the role of investment banks be?
Saudi
Arabia's planned IPO for its state-owned oil company Aramco endured starts and stops
for its late fall offering, especially after it sought a $2 trillion market
value and couldn't be assured the market would assess the same at the desired
level.
A few
years ago, financial markets were struggling and fumbling to understand the
popularity of cryptocurrencies. Many announced they would have nothing to do with them. A few decided to exploit such popularity and determine a role where they can make money. After digesting what they were or supposed to be, financial
institutions were poised to define their roles (advisers, facilitators, brokers, etc.) and then hop onto the bandwagon
in some way.
Cryptocurrencies and Blockchains
By late
2019, cryptocurrencies had not disappeared, but the fad had receded or at least
capital markets and investors got comfortable that they wouldn't major currencies or traditional payments systems anytime soon. They
weren't alarmed the Bitcoin would replace the precious government-sanctioned currencies (U.S. dollar, Euros, e.g.) (as some projected a few years ago). In 2019, Facebook jumped in, announcing a planned creation of a new currency
Libra (along with partners and offering comfort by backing its value with real
assets). By late 2019, Facebook's enthusiasm for the same had waned, and
the company had even suggested it could withdraw from the project.
Distributed
ledger technology (or what is better known as "Blockchain"
technology), the type of system that runs cryptocurrency activity, hasn't
disappeared. A year or so ago, companies around the world began to figure out
how to exploit it to gain advantages in trading, trade processing, trade
finance, and supply-chain management. Industries and companies have begun
to experiment and roll out Blockchain systems for non-cryptocurrency purposes, although progress on all fronts (in, say, trade finance
and trade processing) has been measured.
Companies in Favor and Not
Among big
corporate names, companies (like WeWork) that were favored darlings in decades
past or in recent years, all of a sudden, seemed doomed by 2019. Some companies
(perhaps like a GE or a Tesla) that were rocked, criticized and vulnerable continue to plod along, tweaking and adjusting to figure out a niche
and regain market favorability.
GE has seemingly gone through countless
reorganizations (and senior management changes), yet it may finally get
things right in its latest transformation. Tesla, notwithstanding moments of
anxiety surrounding its head Elon Musk, had struggled with surging operating
costs, uncertain markets, stiff competition everywhere, and burdensome debt. By
late 2019, it had begun to flirt with reporting profits.
Some
companies, like HP (the split-off and incarnation from the old Hewlitt
Packard company), thought they had devised the right long-term strategy,
but all of a sudden must regroup and figure out next steps. HP, in early
2020, is now a takeover target for Xerox.
All over,
markets and investors are watching the entertainment-streaming industry
closely. Before it faced the fierce competition it encounters today, Netflix stepped out in front and helped change behavior of
consumers (or the millions of subscribers willing to pay monthly fees for
content).
The company is now obsessed with and committed to developing its own content (because
it figures it alone can assure the customer base of quality programming), but Netflix is similarly stubborn it can develop new content by funding it with more and more
debt. It knows it has competition (from Disney, HBO, Hulu, and just
about any large company with financial resources and access to content); it may
not understand it may not be able to refinance and roll over its debt
forever.
Amazon: Mightier and Mightier
No
analysis or discussion of global companies these days omit an assessment of
Amazon, which may have--at least for the time being--supplanted big names like
Apple and Alphabet-Google as the mighty titans in corporate market values. The
company has always been propelled by a growth strategy on steroids. Unlike in
years past, the company is now consistently profitable and generating
accounting profits (about $11 billion for 2019) and gushing operating cash
flows (about $8 billion a quarter).
Because
Amazon doesn't pay a dividend (and doesn't appear to be distracted by
shareholder activities who demand dividends and buy-backs), it can reinvest the
cash and continue to get bigger and bigger. It can, too, afford to experiment,
innovate and make investing mistakes. In just three years, the company has
tripled its revenues (now above $235 billion annually). Continued growth and innovation at Amazon are likely the few sure bets for 2020.
Markets like to contemplate, predict and reflect the political outcomes. Markets in early 2020 don't appear to have any intuition about the results of U.S. presidential election or the impact of elections on U.S. financial institutions (to regulate more or to regulate even less?).
About the only thing that's certain in 2020 is that (a) investors demand forecasts, (b) analysts and media observers will provide them, (c) most forecasts will be off base before 2021 arrives, and (d) as soon as there is some informed premonition about what can and will happen, markets will reflect it efficiently and quickly.
Tracy E. Williams
See also:
CFN: And Now Comes Libra, 2019
CFN: What Will Be the Trigger? 2018
CFN: How Will Netflix Manage Its Debt Burden? 2018
CFN: What Does the Market See in Amazon? 2014
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