Investor discipline crucial in low growth decade

Vanguard | 12 December 2016


Investors should expect the low economic growth and modest market returns of 2016 to continue in 2017 and beyond, according to the 2017 Vanguard Economic and Market Outlook paper.

In its annual long-range forecasts, Vanguard analysis points to continued restraint in growth and returns as fundamental trends like globalisation, the ageing global workforce and rapid advances in technology continue to influence global economies and markets.

Vanguard Global Chief Economist, Joseph Davis, Ph.D, said there was a persistent myth that global growth was stagnating, but Vanguard's analyses pointed more to the world digesting a long-term trend of lower, but more sustainable, economic growth.

“The extremes that we are bombarded with each and every day – negative income rates, Brexit, income inequality – may seem like isolated events, but we know that they are inextricably linked by these secular forces,” Mr Davis said.

“Perhaps most significantly, we are focused on the changing tides of technology and a gig economy. This is a significant disruptor, yet the global economy has a remarkable ability to adapt to change. We anticipate muted, but enduring and positive economic growth in the years ahead.”

Vanguard's view on global growth is that, despite the unprecedented role of central banks stabilising economic growth since the Global Financial Crisis, the effectiveness of monetary policy has reached its limit in lifting the world out of the low-growth environment, with fiscal policy changes offering more hope of change.

Australia resilient, with challenges ahead

The local economy remains on track to centre on the long-term growth trend of around 2.7 per cent – although there is a high probability 2017 growth will fall in the 2-2.5 per cent bracket – amid the continuing transition away from intensive investment in the mining sector. Mining investment has continued to gradually wind down in 2016, and is expected to remain on this path until late 2018.

Concurrently, higher investment in dwelling construction has helped to offset this slow down, providing some ballast for the economy. Investment in dwelling construction has continued to grow at a higher-than-average rate, particularly for higher density dwellings, but this is expected to moderate over the next two years.

As the local economy transitions through the long-term commodities cycle, the challenge for the economy is finding new opportunities for economic activity as dwelling construction also slows presents a significant challenge in the coming years.

Market returns set to be lower for longer, but still positive

Vanguard Head of Investment Strategy Group in Asia-Pacific, Jeffrey Johnson, said investors should be realistic but not pessimistic about what the sustained low-growth environment would mean for portfolio returns, both in the coming year and over the next decade.

“Our proprietary Vanguard Capital Markets Model has simulated returns of between 6-9 per cent per annum over 10 years, for a portfolio made up of 50 per cent Australian shares and 50 per cent unhedged international, developed markets shares ex-Australia. This is down from the 10-year forecast last year of 7-10 per cent annualised returns Vanguard made in 2015, and down from Vanguard's forecast of 9-12 per cent from 2010,” Mr Johnson said.

“On the fixed income front, a globally diversified bond portfolio is forecast to return around 1-3 per cent per annum over the next decade. Although these returns are certainly low, investors should remember that bonds aren't just useful for deriving income, they are also invaluable for helping to balance the risks inherent in equity investments.

“Although forecast returns are lower from 2017 onward, the message to investors remains to stay balanced and stay diversified. We expect to see market volatility continue next year, and having a portfolio built to weather market ups and downs in line with an investor's tolerance for risk continues to be essential. The next five years are likely to be tougher for investors than the last five years, so having realistic expectations and the discipline to stay the course will be valuable qualities.

“On top of this, the cost of investing will have an even greater impact on portfolio returns in a low return environment. That's why investors should be particularly mindful of management expenses, transaction costs and tax efficiency when implementing their investment strategies.” Vanguard takes a conservative approach to forecasting, with forward-looking asset returns presented in probabilistic ranges, as projected by the Vanguard Capital Markets Model (VCMM). This proprietary model combines economic analysis and financial modelling, incorporating a range of potential outcomes.

View a full version of the Vanguard 2017 Economic and Market Outlook, please visit