Vanguard s economic & market outlook

Transcription

1 Vanguard s economic & market outlook Q Paul Bosse, CFA Vanguard Investment Strategy Group

2 A world of extremes 2

3 Three secular forces & the key megatrend Technology Demographics The future of employment & the workforce Globalization 3

4 Key economic/portfolio points Convergence to slower global growth Cautious central banks = slow rate of normalization Manage return expectations to be lower 4

5 U.S. key economic/portfolio points Job growth strong, especially in services Fed remains accommodative Inflation remains low but watch labor gains 5

6 Policy rate (%) The Fed anchored by global central bank policy Convergence of central bank policy rates % is likely high water mark for U.S. Fed Funds rate Key: Low rates are secular, not cyclical European QE program continues and U.K. easing likely given Brexit Eurozone US U.S. UK U.K. Japan Note: Dashed lines indicate future projected policy rates. Sources: Vanguard calculations, using data from the Federal Reserve, Bank of England, European Central Bank, Bank of Japan, and Thomson Reuters Datastream. 6

7 European key economic/portfolio points Growth positive but slower than elsewhere Further ECB support, given Brexit, low growth, and low inflation Geopolitical risks mounting 7

8 Economic Policy Uncertainty Index Recession likely in U.K. due to Brexit, but less so in Europe Uncertainty spikes Central banks expected to respond UK Europe US Rates Policy Rate June 2015 Pre-Brexit Post Brexit Sources: Baker, Bloom,and Davis Economic Policy Uncertainty Index ( Source: Bloomberg data on overnight index swaps. 8

9 Chinese key economic/portfolio points Growth slowdown continues but is expected Economic changeover happening but bumpy Leadership questioned 9

10 GDP growth rate (%) Price-to-earnings earnings ratio EM equity markets: The bar has been lowered Growth has consistently disappointed and valuations reflect it Actual growth Expected in Vanguard expectations United States Emerging markets Markets Developed non-u.s. Sources: Vanguard calculations based on data from International Monetary Fund, Thomson Reuters Datastream, Moody s Analytics, Federal Reserve System, and Standard and Poor s. Notes: (Left-hand chart) Each year's expected projections are based on April's data release of the World Economic Outlook Database. Actual growth, between 2010 and 2015, is determined by the most recent database released April 12, 2016, using the metric gross domestic product, constant prices. Right-hand chart Notes: Figure displays the price-to-earnings ratio defined by the most recent price divided by the 36-month average of trailing earnings. United States is represented by the MSCI United States Index, developed markets non-u.s. is represented by the MSCI All-World U.S. Index, and emerging markets is represented as the MSCI Emerging Markets Index. All three indexes are denominated in U.S. dollars and represent an unhedged position with data as of June 30,

11 Yield Interest rates low rates are secular, not cyclical 18% 16% History Forecast 14% 12% 10% 8% 6% 4% 95th 2% 50th 0% 5th 3/31/1871 3/31/1896 3/31/1921 3/31/1946 3/31/1971 3/31/1996 3/31/ year U.S. Treasury Yield yield IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. 10-year Treasury yield projections based on 10,000 simulations from VCMM as of September Results from the model may vary with each use and over time. For more information, please see the important information slide. Sources: Vanguard calculations, based on data from Robert Shiller website, at aida.wss.yale.edu/~shiller/data.htm. 11

12 Probability Projected global fixed income ten-year outlook Expected average return of fixed income: June % 25% 20% 15% 10% 5% 0% Less than 1% 1 to 1.5% 1.5 to 2% 2 to 2.5% 2.5 to 3% 3 to 3.5% 3.5 to 4% 4 to 4.5% More than 4.5% 10-year annualized return Outlook as of June 2010 IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for global fixed income returns in USD. Simulations are as of September 30, Results from the model may vary with each use and over time. For more information, please see the important information slide. Notes: Figure displays projected range of potential returns for portfolios of 70% U.S. bonds/30% ex-u.s. bonds, rebalanced quarterly. For details, see Vanguard s economic and investment outlook (Davis, Aliaga-Diaz, Westaway, Wang, Patterson, and Ahluwalia 2015). Source: Vanguard. 12

13 Probability Projected global fixed income ten-year outlook. Dramatically lower. Expected average return of fixed income: March 2016 & June % 25% 20% 15% 10% 5% Global bond returns % % 0% Less than 1% 1 to 1.5% 1.5 to 2% 2 to 2.5% 2.5 to 3% 3 to 3.5% 3.5 to 4% 4 to 4.5% More than 4.5% 10-year annualized return Outlook as of March 2016 Outlook as of June 2010 IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for global fixed income returns hedged in USD. Simulations are as of March 31, Results from the model may vary with each use and over time. For more information, please see the important information slide. Notes: Figure displays projected range of potential returns for portfolios of 70% U.S. bonds/30% non-u.s. bonds hedged in USD, rebalanced annually. For details on benchmarks used for historical returns, see Indexes used in our historical calculations, on page 5 of Vanguard s economic and investment outlook (Davis et. al 2015). Source: Vanguard. 13

14 Maintain a long-term perspective Average return on U.S. stock: VCMM estimated probability distribution 25% 20% 15% 10% 5% 0% Less -20% to -16% -16% to -12% -12% to -8% -8% to -4% -4% to 0% 0% to 4% 4% to 8% 8% to 12% 12% to 16% 16% to 20% 20% to 24% 24% to 28% 28% to 32% 32% to 36% 36% to 40% More 1-year returns IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM, derived from 10,000 simulations for U.S. equity returns and fixed income returns. Simulations as of December 31, Results from the model may vary with each use and over time. For more information, please see the Important information slide. Notes: Figure displays projected range of potential returns for U.S. equities, rebalanced annually. For details, see 'Vanguard s economic and investment outlook' (Davis et al. 2015). Source: Vanguard. 14

15 Maintain a long-term perspective Average return on U.S. stock: VCMM estimated probability distribution 25% 20% 15% 10% 5% 0% Less -20% to -16% -16% to -12% -12% to -8% -8% to -4% -4% to 0% 0% to 4% 4% to 8% 8% to 12% 12% to 16% 16% to 20% 20% to 24% 24% to 28% 28% to 32% 32% to 36% 36% to 40% More 1-year returns 10-year returns IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM, derived from 10,000 simulations for U.S. equity returns and fixed income returns. Simulations as of December 31, Results from the model may vary with each use and over time. For more information, please see the Important information slide. Notes: Figure displays projected range of potential returns for U.S. equities, rebalanced annually. For details, see 'Vanguard s economic and investment outlook' (Davis et al. 2015). Source: Vanguard. 15

16 Probability Equity market expected returns subdued, but fair relative to inflation and other asset classes Expected average return of global equity market March 2016 & June % 25% 20% Global equity returns % % 15% 10% 5% 0% Less than 0% 0 to 3% 3 to 6% 6 to 9% 9 to 12% 12 to 15% 15 to 18% More than 18% Current 10-year outlook Outlook as of June year annualized return IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for global equity returns in USD. Simulations are as of March 31, Results from the model may vary with each use and over time. For more information, please see the important information slide. Sources: Vanguard. Notes: Figure displays projected range of potential returns for portfolios of 60% U.S./40% ex-u.s. equities unhedged in USD, rebalanced annually. For details on benchmarks used for historical returns, see Indexes used in our historical calculations, on page 5 of Vanguard s economic and investment outlook (Davis et. al 2015). 16

17 Reduce your portfolio return expectations 20/80 Equity/Bond 25 th 50 th 75 th % / 80% 2.6% 3.5% 4.4% 6.5% 60% / 40% % / 20% /40 80/20 20/80 60/40 80/ IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of September 30, Results from the model may vary with each use and over time. Note: Forecast displays 5th/25th/75th/95th percentile ranges of 10,000 VCMM simulations for projected nominal returns for balanced portfolios. Source: Vanguard. 17

18 Important information This information is intended for investors outside the United States and should not be provided to individual investors in the United States. The information contained herein does not constitute an offer or solicitation and may not be treated as an offer or solicitation in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. Broker-dealers, advisers and other intermediaries must determine whether their clients are eligible for investment in the products discussed herein. The placement of the securities does not constitute a public offering of securities under Mexican law and therefore it is not subject to obtaining the prior authorization of the Mexican Banking and Securities Commission of the registration of the securities with the Mexican National Registry of Securities, and therefore the securities may not be publicly offered or sold, or otherwise subject to brokerage activities in Mexico. The securities have not been and will not be registered with the Registro Nacional de Valores (National Securities Registry) maintained by the Mexican Comision Nacional Bancaria y de Valores (National Banking and Securities Commission), and may not be offered or sold, or otherwise be the subject of brokerage activities in Mexico. The investor shall be responsible for calculating and paying its own taxes and receiving any necessary tax advice. Neither the Funds nor Vanguard shall be deemed to have provided tax advice to the potential investor. IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time. The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based. The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include US and international equity markets, several maturities of the US Treasury and corporate fixed income markets, international fixed income markets, US money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time. All investing is subject to risk, including the possible los s of the money you invest. Bond funds are subject to interest rate, credit, and inflation risk. Investments in stocks and bonds issued by non-u.s. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets. Diversification does not ensure a profit or protect against a loss. CFA is a registered trademark owned by CFA Institute The Vanguard Group, Inc. All rights reserved. PRADS_M_