Vanguard expects global equities and bonds to remain the most guarded in ten years, given fairly high equity valuations and the low-interest-rate environment, according to the firm’s 2017 investment outlook report.
‘We continue to believe that global bond yields will not increase materially from year-end 2016 levels,’ Joe Davis, global chief economist noted in the report.
‘The return outlook for fixed income remains positive yet muted.
‘For example, our "fair value" estimate for the benchmark 10-year US Treasury yield still resides near 2.5%, even with two to three near-term increases in the policy rate.'
As Vanguard stated in 2015, even in a rising-rate environment, duration tilts are not without risks, given global inflation dynamics and the firm's expectations for monetary policy, according to Davis.
'Recent low volatility and compressed corporate bond spreads point to credit risks outweighing those of duration.'
On the equity front, Davis said after several years of suggesting that low economic growth need not equate with poor equity returns, the firm's medium-run outlook for global equities remains guarded in the 5%–8% range.
'That said, our long-term outlook is not bearish and can even be viewed as a positive when adjusted for the low-rate environment.'
Vanguard's outlook for portfolio returns is modest across all asset allocations when compared with the heady returns experienced since the depths of the global financial crisis.
'This guarded but not bearish outlook is unlikely to change until we see a combination of higher short-term rates and more favourable valuation metrics,' he said.
'In some ways, the investment environment for the next five years may prove more challenging than the previous five, underscoring the need for discipline, reasonable return expectations and low-cost strategies.'
Davis said that with forecasters having downgraded global growth outlooks for at least five consecutive years, he believes that the risks to a consensus outlook of 3% are more balanced this year.
'We continue to anticipate "sustained fragility" for global trade and manufacturing, given China's ongoing rebalancing and the need for structural business-model adjustments across emerging market economies,' adding that he does not anticipate a Chinese 'hard landing' in 2017.
For developed markets, Davis remains modest but steady.
'Increasingly sound economic fundamentals supported by US and European policy should help offset weakness in the United Kingdom and Japan.
'For the United States, 3% GDP growth is possible in 2017, even as job growth cools.
'Our long-held estimate of 2% US trend growth is neither "new" nor "subpar" when accounting for lower population growth and exclusion of the consumer-debt-fuelled boost to growth between 1980 and the global financial crisis.'