Vanguard s Economic and Market Outlook

Transcription

1 Vanguard s Economic and Market Outlook

2 Agenda U.S. and Canadian economies: Joined at the hip Economic and asset return expectations Inflation and commodities a concern? Where Canada diverges Europe impact: Weak but improving Hard landing in China? Nope Managing the long term: Balanced portfolio construction 2

3 YoY growth U.S. and Canada GDP growth: highly correlated U.S. and Canada real GDP closely matched U.S. and Canada real GDP 10% 8% 6% 4% 2% 0% -2% -4% -6% Canada US GDP relation since 1970s Regression statistics Multiple R R Square Adjusted R Square Standard error Observations 170 GDP relation after NAFTA agreement Regression statistics Multiple R R Square Adjusted R Square Standard error Observations 74 Sources: Vanguard calculations using data from U.S. Bureau of Economic Analysis (BEA), Statistics Canada. 3

4 Canada s trade dependence on U.S.: high but dropping U.S.: Canada s largest trade partner U.S. international trade: more diversified 380,000 90% 350,000 24% 350,000 80% 320,000 22% 320, , ,000 70% 60% 50% 40% 290, ,000 20% 18% 16% 14% 230,000 30% 230,000 12% 200, % 200, % Exports (M) Imports (M) Exports (M) Imports (M) Export % Import % Export % Import % Trade with U.S. about 70% of total international trade Sources: Trade with Canada about 15% of total international trade 4

5 % of total exports to U.S. % of GDP Canada s trade dependence on U.S.: high but dropping Canada s top 5 exports to U.S. Canada's GDP less dependent on export to U.S. 25% 39 20% 15% 10% 5% % Crude Oil Passenger cars, new and used Gas-natural Other parts and accessories Other petroleum products Export to US% of GDP 40% of Canada s economy is trade U.S. trade still a big economic driver for Canada but it is shrinking Source: 5

6 % of indicators Vanguard s U.S. economic outlook: Cautious optimism Vanguard proprietary U.S. leading indicator dashboard, U.S. economic dashboard 100% 75% 50% 25% 0% Source: Vanguard Investment Strategy Group. Data as of March 25, For details request 2011 US economic outlook: Cautious optimism (Davis, et al., 2011). 6

7 % of GDP U.S. debt and fiscal deficits: What is the way out? Optimal deficit reduction scenario: Grand bargain: Rein in entitlement spending and tax reform. Get back to historical mix (20/20 by 2020). Mix should be close to 2/3 spending cuts and 1/3 tax reform Some help from modest growth and Fed zero-rate policy (financial repression) Current fiscal compromise does not sufficiently address long-term deficit issues in scope or structure 26% 24% 22% 20% 18% Historical spending: Total deficit 8% Long-term disconnect (3.8%) By May, we should have an answer 16% Historical taxes: % CBO Baseline Spending CBO Baseline Revenue Sources: Vanguard Investment Strategy Group, based on Congressional Budget Office (CBO) The Budget and Economic Outlook: Fiscal Years 2012 to Notes: CBO baseline spending is baseline/current law scenario spending with and without sequestration. CBO baseline revenue is revenue projected under the baseline/current law scenario revenue. Current 8% deficit was that realized as of September 30, USD 1.2 trillion in spending cuts attributed to automatic sequestration allocated evenly across 10 years

8 Real GDP Cycle peak = 100 U.S. economic recovery: As expected thus far Upside surprise scenario (10%) 3 4%+ real GDP growth Baseline scenario (60%) Secular headwinds, but % real GDP growth Downside-risk scenario (30%) <1% growth or recession Quarters from cycle peak Historical Financial Crises US post-wwii recessions US: 2008/2009 Recession Japan (Q = 100) SPF Consensus with 25th/75th Bands Downside risks Euro break-up China hard-landing U.S. fiscal cliff Sources: IMF, OECD, BEA, Philadelphia Federal Reserve and Vanguard. As of December 31, For details, see Vanguard s economic and investment outlook, January

9 Real GDP growth World economic recovery Real GDP growth, % per annum 10.0% 8.0% IMF forecast beyond % 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% World Developed Economies Emerging Economies Note: Values beyond 2012 reflect the IMF s forecasts from the October 2012 World Economic Outlook and the January 2013 update. Source: IMF October 2012 World Economic Outlook and January 2013 update. 9

10 Net government debt to GDP (%) The crisis was prompted by mounting debt problems Government net debt to GDP IMF projection Debt had been increasing for years in Greece and Portugal But the banking crisis caused problems for Ireland and Spain Even with austerity, debt ratio levels don t turn for some time Debt ratios for euro area as a whole are not markedly high And are even lower for Germany Euro Zone Germany France Spain Greece Italy Portugal Ireland Notes: Displays each country s government debt, net of financial assets, as a % of GDP, with the IMF s forecast for 2013 and beyond. Source: IMF October 2012 World Economic Outlook. 10

11 Real GDP, Q = 100 Restoration of growth remains a challenge Euro area, core and periphery GDP growth CEPR Recession Eurozone Germany, France, Netherlands Euro Periphery United Kingdom United States Notes: Displays each region s real GDP, indexed to 2008 Q1 = 100. Shaded recessions are determined by the Centre for Economic Policy Research. Euro periphery is the GDPweighted average of Greece, Ireland, Italy, Portugal and Spain. Germany, France, Netherlands is the GDP-weighted average of those countries. Data through the latest available as of February 25, Sources: Vanguard analysis, based on data from CEPR, Eurostat, Bundesbank, INSEE, Statistics Netherlands, ELSTAT, Ireland s CSO, ISTAT, Portugal s INE, Spain s INE, UK ONS and U.S. BEA. 11

12 Price index October 31, 2007 = 100 Equities recovering... but Europe still well down Major market indexes, FTSE UK All Share US Total Market Euro Stoxx S&P/TSX Composite Notes: Figure displays the price index for each market, indexed 100 = October 31, Indexes are shown in local currency terms, with price growth only (no income reinvestment). U.S. Total Market is the Dow Jones Wilshire 5000 spliced to the MSCI US Broad Market Index at May 1, Figure covers from January 1,1998, to March 27, Source: FTSE, Dow Jones, S&P, and MSCI via Thomson Reuters Datastream. 12

13 Europe: Some possible scenarios 1.Benign scenario (15%?) Short-term: ESM-ECB bring yields down Medium-term: Fiscal consolidation and reforms on track, growth recovers Long-term: Fiscal/banking/political union/eurobonds 2.Muddle-through scenario (65%?) Short-term: Temporary respite but sustainability questions persist Medium-term: Stuttering progress on fiscal, structural reform; OSI on Greek debt, eventual growth recovery Long-term: Slow adherence to fiscal compact, move to Eurobonds 3.Malign scenario (20%?) Short-term: Adverse events prompts Grexit, deposit runs elsewhere Medium-term: Countries leaving EMU suffer deep recession, banking sector credit crunch in Europe, global recession Long-term: Euro only survives in stronger union of northern Europe 13

14 China India Australia Germany Mexico Canada Russia South Korea Japan France Brazil Spain Italy United States United Kingdom Real GDP growth (year/year %) USD/yuan Has China landed? Economic growth appears to have bottomed Yuan appreciating modestly Yuan appreciating modestly Investment share of GDP, % 40% 20% 0% Nearly 50% vs. the 15-25% that is typical of large economies China net exports, % of GDP 10% The recession forced 8% some rebalancing to occur, more 6% is needed 4% 2% 0% Sources: IMF, National Bureau of Statistics of China, People s Bank of China, U.S. Federal Reserve and Vanguard Investment Strategy Group. Data as of January 16,

15 Vanguard s capital markets outlook: U.S. stocks Average return on total U.S. stock market over next 10 years, VCMM estimated probability distribution 20% 16% 12% Historical nominal returns % % % % 8% 4% 0% Less 0 to 3% 3 to 6% 6 to 9% 9 to 12% 12 to 15% 15 to 18% More Attractive odds of capturing a positive equity risk premium over the long run 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. 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 disclosures slide. 15

16 Yield to maturity (%) Yield curves today Government yield curves Years to maturity United States United Kingdom Germany Japan Canada Notes: Shows each country s active government bond issues, with the exception of the U.S., for which we use constant maturity yields to obtain additional maturity points across the curve. Source: Bloomberg, as of March 28,

17 10-year annualized return (%) Perspective on yields and forward returns Bond return math suggests low current yields correlate with low expected returns Current yield on 10-year: 1.89% Initial yield on 10-year U.S. Treasury Sources: Historical yield data for the 10-year CMT provided by Shiller from 1926 through March 1953 and the Federal Reserve Board thereafter. Total returns for U.S. bonds represented by Ibbotson Associates Intermediate Term Treasury Bond Index from 1926 through 1975 and 10-year CMT U.S. Treasury from Barclays thereafter. Yields shown through December 31, 2002; Returns through December 31,

18 Probability Vanguard s capital markets outlook: U.S. bonds Average return on total U.S. bond market over next 10 years, VCMM estimated probability distribution 30% 25% 20% 15% Historical nominal returns : 5.6% : 3.1% : 8.2% : 5.9% 10% 5% 0% Less 0.5 to 1% 1 to 1.5% 1.5 to 2% 2 to 2.5% 2.5 to 3.0% 3.0 to 3.5% More 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. 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 disclosures slide. 18

19 Inflation and interest rates Historical yields on U.S. 10-year Treasury bond st half (~42 years) 3.14% Nominal 1.71% CPI 1.43% Real 2nd half (~42 years) 6.97% Nominal 4.33% CPI 2.64% Real <4% for the majority of the 1900s Sources: Federal Reserve Board, U.S. Bureau of Labour Statistics and Robert Shiller, as of March 28,

20 Probability Long-term outlook for U.S. inflation Estimated U.S. CPI inflation rate over the next 10 years 40% 35% 30% 25% 20% Median inflation rate : 3.0% Median inflation rate : 2.6% 10-year TIPS BEI (as of Dec. 31, 2012): 2.5% Federal Reserve long-term target: 2.0% 15% 10% 5% 0% -1% or less -1% to 0% 0 to 1% 1 to 3% 3 to 4% More 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. 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 disclosures slide. Source: Vanguard Investment Strategy Group. For details, see Vanguard s economic and investment outlook, January

21 High-inflation concerns Comparing high-inflation environments of 1970s and early 1980s with that of today Disposable income growth (take-home pay) Money multiplier ("velocity of money") Home price growth Bank credit growth Headline CPI Inflation Core CPI Inflation Today Source: Vanguard Investment Strategy Group calculations on data from U.S. BLS and Federal Reserve. Notes: Observations for the 1970s and 1980s reflect the 2-year average prior to the high inflation period. Today s values reflect the latest available 2-year growth. Data as of January 2,

22 Index (Jan = 1) Canadian commodity prices: steadily rising Commodity prices Adjusted commodity-to-exports ratio % % % 1 38% % Total, Excluding Energy Total Note: Commodity exports represented by sum of BOP exports of farm, fishing and intermediate food products, energy products, metal ores and non-metallic minerals, metal and nonmetallic mineral products, forestry products and building and packaging materials as a proportion of all merchandise products divided by goods as a percentage of all exports. Sources: Statistics Canada, data as of March 28,

23 Index Index Housing bubble? Doesn t look like it CPI Disp Income per Household CPI Rent New HP Index New HP Index US Median Sales Price Source: Statistics Canada, Teranet National Bank House Price Index, Moody s Databuffet, Datastream, data as of March 28,

24 Household debt as a % of disposable income Household debt Canada US Adjusted Note: Canadian and United States disposable incomes are not directly comparable. Because United States measure of disposable income includes some factors excluded from the Canadian measure, e.g. certain transfer payments, the United State measure in the graph above are higher than the traditional U.S measure of debt/disposable income by a factor of 1.3. Please see for a description of the differences. Sources: Statistics Canada, U.S. Bureau of Economic Analysis, U.S. Board of Governors of the Federal Reserve System (FRB), data as of March 28,

25 Annualized geometric return Return outlook for balanced portfolios Real returns, 10-year horizon 16% 95th percentile 12% 8% 25th-75th percentile 4% 0% -4% 20/80 60/40 80/20 Portfolio stock/bond allocation 5th percentile US History US History 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. 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. 25

26 Annualized geometric return A balanced portfolio is a good long-term investment strategy for most macro scenarios Vanguard Capital Markets Model 10-year asset return distributions under alternative macro scenarios 14% Subdued below-trend growth (Financial repression) Stronger-than-expected U.S. recovery Japan-like stagnation U.S. fiscal crisis / USD hard landing 12% 10% 8% 6% 4% 2% 0% -2% -4% 60/40 balanced portfolio return since 1960 (8.8%) 60/40 balanced portfolio return since 2000 (4.3%) Notes and general assumptions: These hypothetical data do not represent the returns on any particular investment. The projections or other information generated by Vanguard Capital Markets Model simulations regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results from the model may vary with each use and over time. Data for international equity begins in 1970; data for U.S. domestic equity begins in Domestic equity returns are represented from by the S&P 500 Index; from 1974 April 2005 by the Dow Jones Wilshire 5000 Index; and thereafter by the MSCI Broad Market Index. Global equity is 100% U.S. domestic equity until 1970 and 70% U.S. domestic equity and 30% international thereafter. International equity is represented by the MSCI EAFE Index until 1988 and the MSCI EAFE+EM Index thereafter. Boxes and whiskers represent 10 th, 25 th, 75 th, and 90 th percentiles of the simulated 10-year annualized return distributions Source: Vanguard. 26

27 Balanced portfolio value (indexed to 100 as of market peak) The benefits of long-term perspective, balance and diversification A balanced, diversified investor has fared relatively well Peak to trough return Peak through March 31, % % % 100% Stock 50% Stock / 50 % Bond 30% Stock / 70 % Bond Source: S&P 500 Index and Barclays Capital US Aggregate Bond Index (rebalanced monthly). Data provided by Barclays and Thomson Reuters Datastream, as of March 31,

28 Cumulative return since October 31, 2007 A balanced global approach has fared well Balanced global portfolio performance since October % 20% 10% 0% % % +1.81% -10% -20% -30% -40% -50% % Global Stocks / 40% Global Bonds 60% Canadian Stocks / 40% Canadian Bonds 100% Canadian Stocks Notes: Reflects the cumulative return of various allocations to the Barclays Global Aggregate index (Hedged to CAD), the FTSE All World index (un-hedged in CAD), the FTSE All Share index, and the Barclays Canadian Aggregate. Portfolio is re-balanced to target allocation monthly, at month end. Returns are in CAD terms, with income reinvested, through March 27, Source: Vanguard, based on data from Barclays, FTSE. 28

29 Cumulative return since October 31, 2007 A balanced global approach has fared well Balanced global portfolio performance since October % 20% 10% 0% -10% -20% -30% -40% -50% Oct-2007 Oct-2008 Oct-2009 Oct-2010 Oct-2011 Oct % % % +4.95% 30% Stocks / 70% Bonds 50% Stocks / 50% Bonds 70% Stocks / 30% Bonds 100% Stocks Notes: Reflects the cumulative return of various allocations to the Barclays Global Aggregate index (Hedged to CAD) and the FTSE All World index (un-hedged in CAD). Portfolio is re-balanced to target allocation monthly, at month end. Returns are in CAD terms, with income reinvested, through February 25, Source: Vanguard, based on Barclays, and FTSE. 29

30 Appendix 30

31 Index Housing bubble? CPI CPI Rent HH Disposable Income New HP Index Notes: Estimated household disposable income is (disposable personal income/population)*2. Source: Vanguard illustration using data from Statistics Canada, data as of September 30,

32 Central bank assets as % of 2007 GDP Global QE: Unprecedented, with potential for unintended consequences Central bank total assets 40% 35% 30% 25% 20% 15% 10% 5% Lehman Brothers collapse 0% Federal Reserve Bank of England European Central Bank Notes: Displays each central bank s consolidated assets as a percentage of that region s nominal 2007 GDP. Figure covers period from January 1, 2008, to January 31, Sources: Vanguard analysis, based on data from Federal Reserve, Bank of England, European Central Bank, US BEA, UK ONS and Eurostat. 32

33 Structural reform challenges are great Heat map of structural reform gaps selected euro area economies and comparators Selected euro area economies Selected others Structural reform gaps GRE ITA POR SPA AUS FRA BEL FIN GER IRL NED JAP US SWE UK DEN Labour market inefficiency Business regulations Network regulation Retail sector regulation Professional services regulation Institutions and contracts Human capital Infrastructure Innovation Structural policies are weak in Greece, Portugal, Spain and Italy: This spans labour, product and service markets; and Institutions, human capital, infrastructure and innovation also show weakness Ireland s policies, by contrast, are markedly better. The corollary is that the reforms being enforced have much scope: However they will take time to have an effect. Note: the darker the shading the greater the weakness Source: IMF (2010) Lifting Euro Area Growth: Priorities for Structural Reforms and Governance 33

34 Long-term government bond yield A history of EMU in one chart Sovereign long-term bond yields divide into three periods 20% 18% Convergence Honeymoon Crisis 16% 14% 12% 10% 8% 6% 4% 2% 0% Germany France Spain Italy Periphery Notes: Displays each country s long-term government bond yield on a monthly basis from the IMF International Financial Statistics database. Weak periphery is the average of Greek, Irish and Portuguese yields where available for each country. Figure displays January 1990 to February Source: IMF via Thomson Reuters Datastream. 34

35 Disclosures Commissions, management fees and expenses all may be associated with the Vanguard ETFs. This offering is only made by prospectus. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; read it before investing. Copies are available from Vanguard Investments Canada Inc. at ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard ETFs are available across Canada. Vanguard ETFs are managed by Vanguard Investments Canada Inc., an indirect wholly-owned subsidiary of The Vanguard Group, Inc. In this presentation, references to "Vanguard" are provided for convenience only and may refer to, where applicable only to Vanguard Investments Canada Inc. and/or may include its affiliates. Date of First Publication: April 29, The opinions expressed in this presentation are those of the individual strategist and do not necessarily reflect the opinions of Vanguard Investments Canada Inc. No implied or express recommendation, offer, or solicitation to buy or sell any ETFs or to adopt any particular investment or portfolio strategy is made in this material. This presentation is not research, investment and/or tax advice and it is not tailored to the needs or circumstances of your clients or prospective investors. Certain statements in this presentation may be considered forward-looking information which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Risks include, but are not limited to, local and global economic and political factors, interest and foreign exchange rates, financial market conditions, competition, legal or regulatory changes, and catastrophic events. These views are as of the presentation date, may change materially as conditions change, and are subject to change without notice. The economic statistics and projections presented in this material are subject to revision by the agencies that issue them. Information, case studies, examples, figures and graphs are designed for illustrative purposes only and are subject to change without notice. The case studies and examples do not depict actual performance: the results are either calculated with the benefit of hindsight or are based on hypothetical simulated investment outcomes. The returns reflect the reinvestment of distributions and dividends, but do not reflect fees, transaction costs or other expenses, which would have reduced returns. Vanguard Investments Canada Inc. makes no representation regarding the advisability of investing in third-party products that utilize the indices mentioned herein. Vanguard Investments Canada Inc. does not guarantee the accuracy, completeness, timeliness or reliability of these slides or any results from their use. 35

36 Disclosures (continued) Notes on risk: All investments, including those that seek to track indexes, are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Investing in ETFs involves risk, including the risk of error in tracking the underlying index. ETFs are subject to risks similar to those of stocks. Investments in exchange-traded bond funds are subject to interest rate, credit, and inflation risk. Foreign investing involves additional risks including currency fluctuations and political uncertainty. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. No part of this presentation may be reproduced, distributed, disseminated or referred to, in whole or in part, in any form, including to any investor, without prior written and express permission by Vanguard Investments Canada Inc Vanguard Investments Canada Inc. All rights reserved. 36