Analysts are key financial market stockholder. Researches often use analysts’ makings forecasts as proxies for market expectations and differences in opinions. In addition, analysts’ earnings forecasts are one of the rare settings for which researchers have a large natural data set of individual analysts’ real judgment, and for which the bias in decision making can be observed and verified ex-post. Not surprisingly, the activities of analysts have been a fertile ground for behavioral research. Ago studies have shown that analysts oft suffer from a no. of biases. However, the implications of these believable cognitive biases for traders and, even more so for directors are less understood.
While we believe stocks will trump bonds again in 2014, we do not think the outperformance will be nearly as thespian, and there will likely be periods till which stocks underperform bonds and alternative. In other speech, this is not a time to back down one’s asset allocation and portfolio diversification. Just as a doctor would not recommend an unbalanced crash diet to make up for bad eating habits final year, we think it’s important to stay disciplined with one’s investment approach in order to maintain good financial health.
The challenge will come if rates move higher too quickly and equity investors start to anticipate retardation, which we think could happen later in the year but not in the near term. Therefore, we maintain our healthy appetite for equities as we begin the New Year—but still in the context of a well balanced and diversified diet.
The macroeconomic environment forecast by our economists for this year should prove positive for Equity Tips, given expectations for a moderate pickup in global GDP growth and central-bank policy that is likely to remain highly accommodative. While equity valuations have risen materially in the developed markets over the past year, we do not believe they are overextended. What’s more, the relative valuations compared with other asset classes remain compelling.