Navigating the not-so-roaring 20s

20 January 2020 | Topical insights


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By Shaan Raithatha, economist for Vanguard Europe.

The way investment markets have boomed over the last decade illustrates just how much they've benefited from the policy responses to the 2007-08 global financial crisis and its aftermath.

With central bank money flooding the system after the collapse of Lehman Brothers, asset prices generally floated ever-higher in the 2010s, with the value of the global stock market almost trebling and global bonds delivering annualised returns of around 4% in sterling terms1.

Despite government-driven austerity, it was a solid economic decade too, with growth in most developed countries running close to, or faster than, their historic trends.

The US, in particular, blazed a trail as it recovered from the deep economic recession that followed the global financial crisis. Not only did the world's biggest economy go through a decade without experiencing a recession for the first time since the 1850s, the US stock market also delivered annualised sterling returns of 16%2.

Despite the debt crisis that befell – particularly in Portugal, Ireland, Greece and Spain – the euro area economy as a whole also grew by 1.4% per year on average. In the UK, real GDP growth averaged 1.9% last decade.

In most cases, unemployment has continued to fall too.

However, we don't expect the 2020s to be like the 2010s.

That's because an increasingly unpredictable political environment is dragging on international trade and holding back investment and, by extension, crimping global economic growth. We don't know how long this will last but we envisage a ‘new age of uncertainty' that will likely hold back economic activity and weigh on markets for the foreseeable future.

The monetary stimulus that drove asset returns and economic growth in the 2010s is also unlikely to be repeated.

Some things, we believe, won't change that much: inflation will probably remain either close to target or, in the case of the euro area, continue to undershoot. As we saw in 2019 as the Federal Reserve changed tack on interest rates and the European Central Bank revived its programme of quantitative easing, stagnant inflation coupled with weak economic growth could also continue to defer the task of normalising monetary policy.

In addition, the technological dislocation that has shaken up a range of industries will likely continue.

But, in general, we expect investment returns to be much more subdued.

Interest rates are likely to remain lower for longer at a time when long-term borrowing rates – as represented by bond yields – are already depressed, which will keep a lid on bond returns. Equity valuations, while still reasonable, are also significantly higher than they were ten years ago, providing a headwind to future returns.

As a result, it is important for investors to be more realistic about return prospects going forward and to prepare accordingly.

We expect returns in sterling terms for both global equities and global bonds in the 2020s to be around half of what they were in the 2010s, at 5% and 1.5%, respectively.  However, this is a median projection and the distribution of possible outcomes remains wide.

To try to increase portfolio returns, investors may be tempted to overweight assets believed to offer a higher-expected-return or higher-yield, such as corporate bonds or emerging market equities. While some of these strategies could improve the risk-return profile marginally, they are unlikely, by themselves, to escape the strong pull of the low-return forces in play.

Ultimately, in this challenging investment environment, investors with an appropriate level of discipline, diversification and patience are likely to be rewarded over the long term.

For a deeper dive into our thinking and what it might mean for investors, read Vanguard's 2020 economic and market outlook.

Shaan Raithatha  Shaan Raithatha
  Economist for Vanguard Europe

1 Based on the MSCI All Country World total return index and the Bloomberg Barclays Global Aggregate Bond total return index (hedged).

2 Based on the S&P500 total return index.


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

The material contained in this article 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 is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of units or shares of, and the receipt of distribution from any investment.

Vanguard Asset Management, Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the products described in this article, please contact your financial adviser.

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

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