Powerful predictions

The coronavirus pandemic has underlined the impossibility of accurately predicting the future. Who foresaw the impact a global contagion would have on the world economy and stock markets last year? And if anyone did, were they able to alter their investments before assets crashed in February 2020? If they took pre-emptive cover, did their crystal ball foretell the astounding surge in technology stocks that followed? Did they miss that profitable opportunity?

Despite the obvious difficulty of looking ahead to the future, the art of forecasting potential outcomes is an important part of the skill of investing and choosing where to allocate your precious capital.

One area where forecasting is particularly fraught is in renewable energy, where infrastructure funds are trying to discern the future direction of power prices and the cash flows that determine their net asset values (NAV). Clearly, the rapid development of cheap, clean energy will drive down prices. But to what extent will it trigger more demand, for example, from the mass adoption of electric cars, that will offset that decline?

Jeremy Gordon dives into that debate in our first feature, speaking to two independent forecasters who disagree with the bearish, but influential, predictions of Bloomberg New Energy Finance, but whose own figures may be too optimistic.

One thing is clear. Disclosure by infrastructure funds of the assumptions they are using needs to improve and be more consistent across the sector. GCP Infrastructure (GCP), a high-yielding debt fund I include in my ’10 dividend eyecatchers’ article, has been punished by the market for declines in its NAV that wouldn’t have occurred if it had used less conservative assumptions like some of its rivals.

Property fund managers would also like to be able to predict the future of supermarkets. They have been one of the few winners in the real estate world from the lockdowns. But going forward, will it be the large stores held by Supermarket Income REIT (SUPR) that do best, or will the smaller convenience formats owned by the likes of LXI REIT (LXI) win out? Time to drain your teacups and peer at the leaves left behind.