Criterion of the Month
Ref: COM-Jan-2016


Can Executives Predict The Market?

Arturo Bris

By Professor Arturo BrisArturo Bris
with José Caballero

In the 2015 IMD World Competitiveness Executive Survey, we asked our executives to predict their country’s stock market performance for the year. This was a pioneering study trying to assess the forecasting ability of business executives, or alternatively the importance of sentiment in stock markets.

We are now ready to report the results of the exercise: executives are terrible at predicting the stock market. During 2015, the MSCI World Stock Market Index had a negative performance of -0.32%. In some markets 2015 was a very bad year: Colombia (-22%), the UAE (-17%), Brazil (-12%), Singapore (-11%), and China (-7%) to name a few. On the other hand, countries like Italy (+15%), Belgium (+25%), and Denmark (+39%) are the exception to a somehow disappointing year.

Our executives estimated (remember that our survey is conducted between February and April) a stock market performance of +9.4% for the year, and overall we have found that the correlation between the forecast and the actual return is -0.003—that is, none. In some cases the forecasting error is sizeable: Indonesian executives told us that they expected a return of +22.9% on average for their market, while in reality it has been -9.9%. Sometimes our respondents were too pessimistic: in Ireland, where the stock market went up by 30%, executives predicted 7.5%. The natural optimism of the USA is certainly confirmed by our data: the stock market prediction is 6.9%, the actual return is only +1.3%.

We can draw two conclusions from these data. A naive interpretation of the results would argue that 2015 has been an extraordinary year (perhaps an outlier) driven by the events in China during the summer, which affected stock markets worldwide. However the same can be said of any other year in the history of stock markets. And in a global world, we have to expect that big shocks to a market (especially if the country is the second largest economy) must have an impact everywhere.

Alternatively, we have to admit that, even in the short term, executives are not able to perceive upcoming market movements. We want to think that, being close to the real economy and to day-to-day business activities, corporate executives should have a better information than the average citizen regarding stock markets—and this does not seem to be the case.

Let us finally highlight one important finding of this year’s survey: only in one out of 61 countries included in the IMD World Competitiveness Executive Survey do we find that the average predicted return is negative: United Arab Emirates (-6%). Corporate executives are definitely optimistic

Can Executives Predict The Market?
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