Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 387

2021 economic and market outlook report

The ‘Vanguard Economic and Market Outlook 2021: Approaching the Dawn’ says the expected path to economic recovery hinges on controlling COVID-19. An improvement in the health of the global population will result in an improvement in the economy. Thanks to swift fiscal and monetary policy responses, many economies are in a better position now than during the second and third quarters of 2020.

The next phase of recovery depends on greater immunity to COVID-19 and reduced consumer reluctance to engage in normal economic activities. Should a vaccine become distributed, administered broadly, and be effective, much of the economic losses from COVID-19 could be recovered in the next year. That said, there is risk that if immunity does not rise, economies may only see marginal progress from current levels.

The way the health recovery will drive economic activity is like this:

Which leads to the base case economic scenario for 2021:

  • Major economies will achieve greater immunity to COVID-19
  • Face-to-face social and business activity will normalize
  • Unemployment rates will fall
  • Inflation rates will move higher, and
  • Pre-pandemic levels of economic output will be reached

In countries with more effective containment of the virus, such as in Australia and China, the return to normalcy may prove to be slightly faster, with Australia’s expected growth of 4% likely to fuel an expected return to pre-pandemic levels by the middle of next year compared to the end of the year for countries such as the Euro Area and the UK.

Three post-pandemic scenarios

Looking beyond the shadow of COVID-19, our outlook details longer-term effects that the pandemic may have on the economy, including: the acceleration of work automation and digitalisation (i.e. working remotely), continued slow-deglobalisation and supply chain recalibration, as well as changes in the expectations and preferences for government policy.

Under the confluence of these forces, Vanguard hypothesises three possible post-COVID scenarios over the medium-term with consequences for growth, inflation, interest rates and productivity. We assign probabilities to each, as follows:

Compared with falling into a prolonged stagnation (‘off-course’) or a rapid reflation and surge in productivity gains (‘path improved’), we see a return to steady but still moderate growth, and interest rates normalising gradually from historic lows, though remaining low and supportive for some time.

Based on these scenarios, balanced portfolios with different asset mixes may not always shoot the lights out but they will not produce the worst results either. They are a good solution for most long-term investment portfolios and for investors who do not hold a strong view about the future state of the economy.

A moderating outlook for global asset returns

Vanguard’s Capital Markets Model projections gives an outlook for global and Australian equities in in the 5%-7% and 5.5%-7.5% range respectively for returns over the next decade. While this range is below returns seen over the last few decades, equities are anticipated to continue to outperform most other investments and the rate of inflation.

10-year annualised forecast: setting reasonable expectations

Interest rates globally are expected to remain low despite a constructive outlook for firming global economic growth and inflation as 2021 progresses. While yield curves may steepen, short-term rates are unlikely to rise in any major developed market as monetary policy remains highly accommodative. Bond portfolios of all types and maturities are expected to earn returns close to their current yield levels.

Risks to the Australian outlook

The risk to the economy and markets should shift as 2021 progresses. Between now and widespread vaccine distribution, health-related risks to economic growth and sentiment should prevail. However, as growth and inflation firm in 2021 and immunity to COVID-19 increases, an 'inflation scare' is possible. Ultimately, inflation could cyclically bounce higher in the middle of 2021 from current lows owing to an ongoing economic recovery, before plateauing back to the mid to low 1% levels, and such a move could introduce market volatility.

Meanwhile, the tapering of relief measures poses a risk to the consumption and financial stability outlook, but Vanguard takes comfort in the resilience and speed of the initial recovery to date, and expect the household savings buffer to be used to smooth spending.

In 2020, disciplined investors were yet again rewarded for remaining invested in the financial markets despite troubling headlines and a challenging environment. For 2021, the wisdom will be to maintain that same level of discipline and long-term focus, while acknowledging returns may moderate from the past.

 

Qian Wang is Chief Economist, Asia-Pacific and Beatrice Yeo is Economist, Australia in the Vanguard Investment Strategy Group. Vanguard Australia is a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any individual.

For articles and papers from Vanguard, please click here.

 


 

Leave a Comment:

     

RELATED ARTICLES

This time it really is different … or not

banner

Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates

Superannuation

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.

Superannuation

How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.

Retirement

Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.