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Can we expect a return to double-digit market growth?

15 August 2018 | Markets and Economy

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At the end of last year, when Vanguard published our investment outlook for 2018, we had stated the following: "For 2018 and beyond, our investment outlook is one of higher risks and lower returns." Halfway through the third quarter, have things changed and are we now more optimistic?

The short answer, unfortunately, is no. Year to date, a lot has happened that would make it prudent to remain cautious:

  • A potential trade war has erupted between the US and China, as well as other countries.
  • The US has withdrawn from the Iran nuclear accord.
  • Oil and other commodity prices have trended higher.
  • Political risks in Europe over Brexit and other issues have continued to rise.
  • The US has enacted sweeping tax cuts.

Welcome to a new era of lower returns

Against this backdrop, what can you expect from financial markets? First and foremost, you need to remember that the era of very accommodative monetary policy we've been living through for the past several years is now coming to an end. Since the global financial crisis, central banks across the world have been assisting markets through the use of quantitative easing. This means they have been buying government bonds and other financial assets on a very large scale in order to stimulate the economy and increase liquidity. The aim is to encourage firms and households to spend money and get the economy growing again.

Having done its job, it’s now payback time. The relatively subdued outlook for market returns are very much a consequence of the unwinding of these stimulative policies, as well as consolidation after very strong returns in recent years.

Over the coming years, we expect global stocks to return somewhere in the range of 2.5% to 4.5% on an annualised basis, compared with around 16% in the years since the global financial crisis. That's not to say we won't have years when the markets do better than that, or years when returns are negative.

But inflation will have an impact

That range is our forecast in nominal terms, so before taking inflation into account. But thankfully, inflation is likely to be lower than the rates we saw in the 1980s and early 1990s. Going forward, our base case is that inflation will run a little bit below 2%. So using back-of-the-envelope maths, you're looking at an annualised return for global equities in the range of 0.5% to 2.5% after adjusting for inflation.

What should you do?

Admittedly, our return projections are low and if you have grown accustomed to double digit returns, these forecasts will make worrying reading. However, we think it's important to be very forthright about them so that you can make informed decisions about where and how much to invest.

If you already have a sensible investment plan designed to carry you through markets good and bad, hopefully you'll have the discipline and perspective to remain committed to it despite the muted return outlook.

That will probably result in better investment outcomes than if you give in to the temptation of adding higher-yielding investments in the hope of getting back to the levels of return you've seen in recent years. In some circumstances, those investments might deliver higher returns. What's more certain is that they'll add risk.

TThere's nothing you can do about the outlook for lower expected market returns, no radical new investment strategy to turn to. As always, it's important to stay focused on the things you do have control over that can increase your chances of achieving your investment success, like saving more and keeping your investment costs low.

Alexis GrayAlexis Gray
Vanguard senior economist

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

Other important information:

This document is designed for use by, and is directed only at persons resident in the UK.

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities 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.

The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

The opinions expressed in this article are those of individual authors and may not be representative of Vanguard Asset Management, Limited.

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