Global market outlook: No pain, no gain
11 December 2018 | Markets and Economy
Slowing growth and monetary policy normalisation have spurred bouts of volatility. Will they trigger a bear market? In this short video, we talk about our expectations for investment returns across a range of asset classes. Peter Westaway, chief economist and head of investment strategy, Vanguard Europe
Leo Schulz (moderator): With slowing growth and continued policy normalisation, it is perhaps not surprising that we have seen periodic bouts of volatility in asset markets.
My name is Leo Schulz and I have with me Dr Peter Westaway, chief economist and head of investment strategy at Vanguard Europe.
Peter, should investors be getting ready for a reversal in asset values?
Peter Westaway (chief economist and head of investment strategy, Vanguard Europe): So we wouldn’t go as far as to predict a bear market, but in the backdrop of slowing global growth and the removal of stimulative monetary policy, we do see the asset return outlook as being pretty guarded, and on top of that we probably think that the risks of a reversal are more raised than they may have been in the past.
Leo Schulz: With rising rates in the U.S., doesn’t that mean that, and indeed, that may also be the case in the U.K. should that not mean better returns in fixed income?
Peter Westaway: Yes it does. We are expecting that rates are going to be very slightly higher this year than we were saying this time last year, so we’re looking at returns in fixed income markets in the region of 1-2.5%, and that is partly because policy rates and yield curves, as a whole, are moving up. But, of course, one of the consequences of that is as yield curves move up, that does act as a drag on capital returns, so overall that means that the return on fixed income is pretty muted and, of course, it compares very unfavourably with the sorts of returns we got in fixed income markets over the last 20 years or so, probably around 7%.
Leo Schulz: What about with equity markets, Peter? What is your view there?
Peter Westaway: Well, similarly, we have a fairly muted return outlook for equities as well. Let’s not forget that this since the financial crisis, returns on equity markets, globally, have been up above 10%, but looking forward over the next 10 years, we’re looking at returns of around 3-5%, whether one is focusing on the U.K. market or the global market outside the U.K.
Leo Schulz: Still relatively subdued.
Peter Westaway: Yes, indeed.
Leo Schulz: Peter, where do the biggest risks lie in client portfolios?
Peter Westaway: Well, I think, as is usually the case, the biggest risk is in the equity portion of the portfolios and more generally high beta assets. They are much more likely to have a bigger correction than the more stable fixed income elements to the portfolio.
Leo Schulz: Peter, thank you. As we have emphasised in previous economic and market outlooks, the benefit of a globally diversified portfolio with an appropriate balance between equities and fixed income is as important in today’s market as ever.
Thank you for watching.
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. Figures are hypothetical projections and actual results are likely to vary.
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