Vanguard's global outlook for 2020: The new age of uncertainty

December 6, 2019

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Joe Davis

Joe Davis
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Expect slowing global growth and elevated uncertainty creating a fragile backdrop for the markets going into the new year and beyond, according to Vanguard economists.

The slowdown in global growth described in last year's Vanguard Economic and Market Outlook was accentuated in 2019 by a deterioration in the global industrial cycle. A broad escalation of policy uncertainty, especially tensions between the U.S. and China, has largely driven this downturn through postponed investments and declines in production.

Our outlook in brief:

  • Global growth: It's likely to stay lower for longer as we do not anticipate a significant reversal of the tariff escalation or a meaningful resolution to broader trade and geopolitical tensions.
  • Inflation: Across much of the developed world, inflation is likely to remain below central bank targets. Persistent structural factors have been pushing down some prices while inflation expectations have fallen short of most policy targets, implying increasing doubts about the effectiveness of monetary policy.
  • The financial markets: We expect returns over the next decade to be modest at best. While our equity outlook has improved, owing to mildly more favorable valuations, the chance of a large drawdown in the near term remains elevated. We expect fixed income returns to be lower given the decline we've seen in yields over the past year, but high-quality bonds will remain a key portfolio diversifier.

Portfolio-construction strategies: Time-tested principles apply

Our outlook suggests a somewhat more challenging environment ahead. The market's efficient frontier of expected returns for a unit of portfolio risk is now in a lower orbit, and the frontier's relatively flat shape suggests that increases in expected portfolio returns for taking marginal equity risk are not well-compensated by historical standards.

Based on simulated ranges of portfolio returns and volatility, the diversification benefits of global fixed income and global equity remain compelling. Investors who have conviction in a particular future scenario and have the willingness and ability to accept forecast model risk may be able to modestly improve risk-adjusted return over the long term with asset-return-centric tilts or time-varying portfolio strategies, but they are unlikely to escape the lower-return orbit. For the best chance of success, these strategies require a portfolio-centric approach that leverages the benefits of diversification by simultaneously weighing risk, return, and correlation.

Learn more about our global economic outlook, inflation, monetary policy, and the implications for investors in the Vanguard Economic and Market Outlook for 2020: The New Age of Uncertainty.

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  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.