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There is always a lot of interest in predicting the future, especially at this time of year when experts telling us what to expect over the next 12 months inundate us. In general, the quality and results of predictions are unimpressive. 2020 has been a case in point. Very few predicted the COVID pandemic’s destructive toll on markets and economies. In addition, very few expected the impressive recovery in financial markets witnessed since March.
For this reason, we decided on a different approach for our look-ahead to 2021. It was inspired by the work of the Good Judgement Project (GJP), which was established in 2011 as US Intelligence harnessed the wisdom of the crowds to forecast world events.[i]
We invited our own crowd of ‘experts’ to add imagination to thinking about what might shape the fortunes of real estate investing and to look beyond the post-pandemic world over the next five years. It was not a scientific exercise, but it avoids the standard “this is our outlook”, while highlighting the serious challenges of forecasting the social, political, and economic issues that affect our asset class.
In the past, this column has tried to forecast world cup rugby results as well as real estate market expectations, with, putting it kindly, modest results. Sometimes it helps to go back to basics.
Market participants have begun to show growing interest in so-called Super-forecasters. The Good Judgement project uses a collective of non-expert experts who are adept at predicting across a range of subjects where they often have limited expertise. They come from diverse backgrounds.
Nonetheless, they boast an impressive record. This has interested the UK and US governments. Researchers found that a small percentage of the forecasting population have considerable skills. So, taking inspiration from their work, we decided to recruit ‘talented’ non-experts to consider the probability of a handful of events that could shape real estate markets.
I asked BNP colleagues questions about events that may or may not take place over the next few years. The BNP bench was not as deep as the GJP’s, but it was no less talented.
The questions concern the likelihood of these events happening over the next five years:
The range of responses was interesting, with quite pessimistic views about the global economy, optimism about working from home and – interestingly – some confidence that the next big thing in equities may happen outside of the US. How accurate these forecasts are remains to be seen, but the range of answers is pronounced as exhibit 1 illustrates.
Exhibit 1: Average probability scores for questions on a range of potential events over the next five years – minimum, maximum and mean probability (probability in %)
Source: BNP Paribas Asset Management
The thought-provoking work of the Good Judgement Project and our own, albeit small-scale, survey highlight some of the challenges inherent in bringing rigour and discipline to forecasting and improving accuracy.
A number of questions emerge.
Very few commentators predicted the consequences of the devastating pandemic at the beginning of this year. Likewise, very few experts were saying in 2010 that the UK would have left the EU by the end of the decade. Looking back further, to the start of 2009 at the peak of the Financial Crisis, many investors had written off real estate because it was a levered asset class. Yet over the next three years, global real estate significantly outperformed global equities.[iii]
Perhaps this confirms that we do need more daydreamers, crystal ball gazers and lateral thinkers to navigate the future. Certainly, after this exercise, market participants such as myself need to acknowledge that we are members of JK Galbraith’s group of those who “know they do not know.”
[i] Philip E. Tetlock, Barbara Mellers, and Don Moore professors at the University of Pennsylvania
[ii] Quote from JK Galbraith, Source: Equities.com
[iii] Source: Bloomberg, December 2020; the FTSE EPRA Nareit Developed index returned 17.3% more than the MSCI World index between 31.12.2008 and 31.12.2011
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.
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