[Inside Chodong] Securities Firms’ ‘Decision to Apologize’... The Limits of Forecasts Based on the Past

[Asia Economy Reporter Lee Seon-ae] Recently, securities firm research center officials I met unanimously said that the reason for last year's missed forecasts was the failure to properly interpret the U.S. Federal Reserve's (Fed) policies. They did not anticipate the rapid interest rate hikes and the prolonged monetary tightening. Index forecasts were significantly off. As a result, they issued an absurdly rosy forecast of 'KOSPI 3600' and were busy playing catch-up by revising and supplementing it according to market conditions.

Although they say they are too embarrassed to raise their heads, few securities firms have had the courage to face their embarrassment directly. Exceptionally, Shin Young Securities Research Center released a reflective report titled 'My Mistakes in 2022' under the name of Center Director Kim Hak-gyun and nine researchers. In the lengthy 32-page reflection, Director Kim said, "Sometimes analysts are right, sometimes wrong, but if we do not learn from past mistakes, how can we make good forecasts in the future?" He mentioned three mistakes. First, he underestimated the likelihood of prolonged monetary tightening by central banks worldwide. He also admitted failing to anticipate Russia's invasion of Ukraine. Lastly, he incorrectly predicted that central banks would consider not only inflation control but also financial stability as important factors.

Director Kim Hak-gyun is one of the representative figures who view the market conservatively. He warned of further declines in the KOSPI and advised investors to approach cautiously. Unlike Director Kim, some securities firms that issued overly optimistic forecasts did not seem to have the resolve to apologize and remained silent.

The new year dawned, and as usual, research centers released their annual index forecast reports. Predictions varied, such as 'high-low' and 'high then low.' Amid this situation, the KOSPI has shown severe volatility, plunging close to last year's yearly low before rebounding. Until the recent rebound, fear dominated the market that the KOSPI could reach the lows predicted conservatively by major securities firms such as Daishin Securities (KOSPI bottom 2050), Samsung Securities (2000), Shinhan Investment Corp. (2000), Hana Securities (2050), and Korea Investment & Securities (2000). Moreover, due to Q4 earnings shocks and fears of accelerating recession, the KOSPI's volatility is expected to increase further.

Currently, the Fed's tightening resolve is strong, but it is difficult to gauge how policy direction will change depending on the level of inflation. Especially this year, four members of the Federal Open Market Committee (FOMC) will be replaced. The FOMC consists of 19 members, of whom 12 have voting rights. The four new voting presidents of regional Federal Reserve Banks are Patrick Harker (Philadelphia), Lori K. Logan (Dallas), Neel Kashkari (Minneapolis), and Charles Evans (Chicago). Among them, Neel Kashkari is considered hawkish. Patrick Harker and Lori K. Logan are neutral, and Charles Evans is classified as dovish. Overall, the voting members this year will be less hawkish.

Meanwhile, Fed Chair Jerome Powell declared early on that there would be no rate cuts this year. However, on Wall Street, there is a clear sentiment of distrust toward Powell's remarks. They believe that if inflation subsides and a recession fully takes hold, the Fed may change its policy.

Securities firm research centers consider index forecasting the most important task of the year and devote great effort to it. However, predicting a market full of various variables may not be within the realm of humans (analysts).

Therefore, especially, one must avoid the mistake of making hasty predictions. I hope last year's forecasts, which prematurely made rosy predictions by focusing on past Fed policies, serve as a lesson. Reflecting on past misjudgments is essential to improve the quality of analysis. Although there are concerns that reflection could be abused as a pardon, I want to applaud the fact that places that were previously reluctant to reflect have now done so. I hope the reflection by Shin Young Securities analysts, who conveyed that they 'felt the limitations of forecasts based on past cases,' will serve as a foundation to analyze the market full of variables more meticulously and become a guide for individual investors.