Globalisation, trade, and the future of work

Vanguard | 03 March 2017


Vanguard's Global Chief Economist, Joseph Davis Ph.D., spoke to Australian financial advisers this week, explaining the forces driving change in the global economy and highlighting the future trends that will shape markets and the investor experience.

Speaking to hundreds of financial advisers attending Vanguard's national Adviser Roadshow events across Australia, Mr Davis presented Vanguard's views on a range of global trends that hold significant implications for the growth of financial markets and investment returns in the coming years.

Commenting on growing discourse about globalisation and free trade, Mr Davis said Vanguard analysis showed that increasing trade barriers would not reverse recent employment trends in manufacturing and other sectors where traditional jobs were changing or disappearing in many countries.

"Free-trade has never been in the crosshairs from an economic perspective more, certainly since I've been in the profession," Mr Davis said.

"There is a growing populist belief that trade is a zero-sum game, suggesting that if I trade with you, you're going to win at the expense of me, or I'm going to win at the expense of you. One side wins, and by definition the other side loses.

"This is a misdiagnosis of the problem. No matter how high you raise tariff rates, they will not change trade deficits."

Mr Davis said that it was the pace of technological change across industries and workplaces, rather than growing free-trade, that was the biggest disruptor to the nature of employment globally.

"It is not globalisation that has been the primary reason why manufacturing jobs have declined over the last few years, it is technology. Whether it's in Australia, or the US, or the UK, or Japan or Germany, this is a global phenomenon.

"Which country has lost the most manufacturing jobs over the last five years? China.

"Across all regions this is largely due to automation, jobs that are more routine will tend to go away. That has been a general theme in every market we have analysed over the past 30 years.

"Of over 50 per cent of the jobs that exist globally today, 50 per cent can be automated away through current technology. And that's including industries outside of manufacturing. It's industries such as financial services, healthcare, education – areas that have been strong generators of growth.

"Unless the computer is a compliment to the job you do, rather than a substitute, there's going to be an increasing threat of automation going forward. My point here is not to be bearish. We will see productivity return, but it does mean we will continue to see income inequality rise on a secular basis."

Market outlook

Turning to Vanguard's outlook for global markets, Mr Davis said volatility will increase over the next two years and returns like those seen over the last five years will likely not continue. The current five-year outlook he shared was for global shares returning 6-8 per cent and bonds 1-3 per cent, with a backdrop of 1-2 per cent expected inflation.

"I can tell you that for the next five years the financial market returns that we are anticipating for all asset classes globally are the most guarded that we have generated since 2006, though not at the low levels we were anticipating at that time," he said.

"In my mind, the investment numbers for the next five years are going to be more challenging than they have been for the previous five, despite the fact that we are seven years into the global economic recovery.

"What are some of the things we can do to improve our odds of success in the coming years?

"Decreasing investment costs is very powerful. You see the return on capital tenfold in the power of return relative to asset allocation.

"Working longer, saving longer, is a very effective antidote in an environment of low returns. It may not be the most compelling thing that we may want to do. It's always nice when the financial markets do a great deal of the heavy lifting, and they have done a lot over the last five or six years."

Introducing low-cost active

Following Mr Davis' presentations at the recent adviser events, Vanguard Australia Head of Intermediary Distribution, Matt Willis, discussed the evolution of Vanguard's business in Australia to include low-cost active funds that will complement the existing suite of index funds and ETFs.

"Vanguard has over 40 years of expertise managing active funds in the US- it is in our DNA- and we believe there is a clear opportunity to offer Australian investors genuine low-cost, high-quality active funds," Mr Willis said.

"The continuing globalisation of Vanguard, particularly across the Investment Management Group, has made it possible to harness our expertise and scale to begin offering low-cost active funds in Australia."

Mr Willis also discussed Vanguard's enduring focus on driving down costs for the end investor.

"Years of research tells us that the lower the investment cost, the higher the chance of success for the investor, regardless of investment style," he said.

"In Australia, the average management cost of active equity funds is 1.23* per cent. Comparatively, our initial three active equity products are all well below this average, with management costs of 0.45 per cent per annum. As we continue to build out our active offering we will provide more low-cost options for Australian investors."


*Source: Vanguard analysis of Morningstar data, as at 31 December 2016