Below are key highlights from Vanguard's economic and market outlook (VEMO) summary report for 2020:
Global economic outlook: A slowdown in growth
Trade tensions and unpredictable policymaking will continue to weigh negatively on demand and supply, causing a further contraction of world trade relative to GDP.
We believe the US is likely to avoid a recession, but growth will slow below trend to around 1%.
Meanwhile, we expect growth in China to drop below trend to 5.8% and, in the euro area, it will likely stay weak at around 1%.
For Australia, we expect a below-trend growth rate of around 2.1%, with the domestic economy being cushioned to some degree by recent monetary and fiscal policy actions.
Inflation in Australia, alongside the euro area and Japan, is expected to undershoot the Reserve Bank's targets. And continued spare capacity in the labour market could spur the RBA to conduct further monetary easing to help stimulate wage growth and boost inflation.
With the Bank approaching the lower bound of the cash rate (0.25 – 0.5%), we see a light quantitative easing program as an increasing possibility.
Global investment outlook: Lower for longer
Investors should be mindful that heightened policy uncertainties, late-cycle risks and stretched valuations will continue to unsettle financial markets in 2020 and beyond.
So we have a guarded near-term outlook for global equity markets, and we believe the chance of a large drawdown for equities and other high-beta assets remains elevated.
To offset this, investors should not overlook the role of high-quality fixed income assets as a key portfolio diversifier, although expected returns will be positive only in nominal terms.
We expect annualised returns for Australian fixed income will be between 0.5% - 1.5% over the next decade, and for global ex-Australia fixed income will be slightly higher in the range of 1.0% - 2.0%.
For the Australian equity market, the annualised return over the next 10 years is in the 4.0% - 6.0% range, while returns in global ex-Australian equity markets are likely to be about 4.5% - 6.5% for Australian investors.
Given our outlook for lower global economic growth and subdued inflation expectations, risk-free rates and asset returns are likely to remain lower for longer compared with historical levels.