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The Historic Ratios Achieved an 80% Success Rate in 2022

Peter Hemple uses the historic ratios for major asset prices as an indicator of what to expect

As we take our annual look at what has happened to the five major asset prices (the FTSE 100, gold, Brent crude oil, UK property and London property) over the past 12 months, and what the historic ratios indicate might happen this year, it is worth noting that 2022 was another successful year for the ratios as a guide to making profitable investments.

The predictions I made a year ago, using the historic ratios as a guide, were correct overall last year when looking at the direction of prices. To recap, the predictions a year ago were:

  • FTSE 100 to increase by 22.9% (it increased by 1.2%) – CORRECT
  • Gold to fall by 22.8% (it fell by 0.3%) – CORRECT
  • Oil to increase by 24.1% (it increased by 10.4%) – CORRECT
  • UK property to increase by 3% (it increased by 4.8%) – CORRECT
  • London property to fall by 6.8% (it increased by 4.1%) – INCORRECT

Four out of five predictions moved in the right direction and as I have always stated in these historic ratio articles, it is not wise to bet against London property, especially in the long term. So, if the ratios predict that London property should fall in value, the best bet would be to avoid further property acquisitions until it looks more appropriately priced. Unlike the FTSE 100, gold and oil, buying and selling real estate is accompanied with huge costs like stamp duty and estate agent fees etc.

However, if you don’t buy London property one year and it goes up in value, in these articles we will class that as a ‘loss’ because in theory you have missed out on the potential capital appreciation. Overall, with equally-weighted long/short positions, the historic ratios would have returned a profit of 2.5% last year, which was worse than the 10.8% achieved in 2021, but I am willing to bet that many investors, for example those that invested heavily in Bitcoin or Tesla a year ago, would be over the moon today if they increased their wealth by 2.5% last year.

The key to making money from the historic ratios though, is to focus on the commodity that is most ‘out of sync’ with the rest, and at the start of last year that was clearly the oil price (Brent crude), which was priced at $77.87 per barrel. A year ago, I wrote that the oil price (using the historic ratios as a guide) should be $93.67 per barrel, which was 24.1% higher.

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