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Investment forecasts unreliable in unpredictable times

Investment forecasts, just like weather forecasts are just that – projections of what might happen on the future, based on past patterns calculated alongside all possible factors that might help provide an estimation of what might occur in the short term. If you’ve ever relied on a weather forecast to plan an event, you know that the best weather apps are rarely 100% accurate and sometimes just get it downright wrong.

Which is why most of us, already used to the psychological perception that weather forecasts are mostly inaccurate, simply use them to help inform but not entirely drive our decision making. The same should be said for investment outlooks. And yet, it is not always so. As humans it is inevitable for our brains to crave certainty, and when it comes to money and our investment portfolios, the last thing we want is to not know what might happen.

But as the last two years have demonstrated in spades, uncertainty is here to stay. And with that in mind, as we wind down the year that was, and look hopefully towards 2022, now is probably a good time to re-evaluate your investment portfolio and figure out if your risk profile and investment objectives have changed. And if they have, to assess if your asset allocation and investment strategy are still applicable, in your investment time frame.

Against a backdrop of heightened uncertainty, and in recognition of how quickly forecasts can change, Vanguard’s annual economic and market outlook sets out our baseline scenario for the year ahead. The analysis also lays out potential risk scenarios – both upside and downside that investors should be mindful of, and the signposts to watch out for in each of these scenarios. Our main message for investors who do not have a strong conviction of how the future will pan out, is that a globally diversified balanced portfolio will serve you best in unpredictable times.

Global economic outlook

In our baseline reflation scenario, the global economy is expected to continue its recovery in 2022, albeit at a slower place, regardless of supply-chain dynamics. In the US and Euro region, growth is expected to normalise to 4%, while in the UK, growth is anticipated at about 5.5%. In China, growth is projected to fall to about 5%. By contrast, in Australia, a slightly more positive picture off the back of a lacklustre 2021 is expected, with stronger growth of 4.5% expected for 2022, thanks to an accelerated vaccination roll-out.

That said, the outlook – just as with weather forecasting – has risks embedded, and our report highlights the potential risk factors that could shift the dial to the other side. In addition to ongoing health risks coming from potential virus mutations like Omicron, we highlight risks coming from persistent labour shortages, elevated inflation and potential policy missteps. In particular, the outlook for policy will be especially crucial in 2022 as support and stimulus packages enacted to combat the pandemic driven downturn are gradually removed. The timing, pace and magnitude of stimulus removal could pose a new challenge for policymakers and a new risk to financial markets.

Unwinding of monetary policy

Inflation continues to be a media buzzword this year, worrying not just economists and policymakers. Persistently elevated inflation may force policymakers to tighten faster, earlier and much more than expected. In the US, we expect the Federal Reserve to raise rates to at least 2.5% by the end of the cycle, higher than what most in the market are pricing in. Meanwhile in Australia, a surge in inflation expectations could lead the RBA to hike interest rates earlier than expected, despite our expectation that rates will remain on hold for 2022 given sticky wage dynamics.

Importantly, while the prospect of modestly higher inflation and rates may lead some to question the benefit of bonds in an investment portfolio, our research nonetheless finds that the diversification benefits delivered by this asset class are still relevant.

Overvalued equities

Vanguard’s Capital Markets Model® has for several years now, cautioned that US equities have never been more overvalued since the dot-com bubble era, and are approaching 'stretched' territory, driven by valuation expansion, not increased profit. Thus the overall outlook for 2022 remains in guarded territory and investors, particularly those in the US, should brace for a lower-return decade. Australian equities are similarly stretched, though to a lesser extent, hence our 10 year annualised returns for the local market are expected to be around 2% lower than our outlook last year, in the range of 3.5-5.5%.

Diversify to benefit

Despite the outlook for Australia looking relatively moderate, it does spell opportunities for Australian investors who allocate a portion of their portfolios to global assets. It also underscores the value of building a broadly diversified investment portfolio. Gains from one investment market could help balance out another investment market’s losses, resulting in a portfolio that is less vulnerable to the impact of significant swings in performance.

The last 24 months have rewarded those who remained invested in the financial markets despite the challenging environment and troubling headlines. It would only seem prudent to continue holding on to this discipline and long-term focus for the years ahead.


Beatrice Yeo is an 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.


December 30, 2021

Personally , I think that this article by Beatrice Yeo is an honest attempt to evaluate a very difficult investment situation .
Nobody KNOWS what will happen and where "the market" will go , and a cautious "best guess" is all that is available
after evaluating ALL the available information at THAT TIME ! "Hind-sight" is always better !
To disparage someone for their honest opinion is churlish as , overall , "Vanguard" has performed reasonably well.
Vanguard's InvestSMART International Equities return for 2021 was 26.86% and is "not to be sneezed at ' is it !?
[ Even with fees of 0.55 % p.a. ].[ I do my own "guesswork" ....and would be pleased to get that return consistently ! ]
I have achieved FAR HIGHER returns [ he crows !!] .............and far lower returns....................and downright 2021.
So , I appreciate the 'diversity' of 'outcome' possible in this 'post-modern' , 'politically correct' 'invest-iverse' ; and also the
impossibility of always getting it correct !!
Beatrice bravely says : "In the US, we expect the Federal Reserve to raise rates to at least 2.5% by the end of the cycle,....."
And : "while in the UK, growth is anticipated at about 5.5%. In China, growth is projected to fall to about 5%. By contrast, in Australia, a slightly more positive picture off the back of a lacklustre 2021 is expected, with stronger growth of 4.5% expected for 2022, thanks to an accelerated vaccination roll-out."
And finally : "The last 24 months have rewarded those who remained invested in the financial markets despite the challenging environment.....etc"......and it has ! QED
Kevin : You say ""buy and hold is a gamble........" that is axiomatic..... Why not ask the opinion of Warren Buffett who says :
“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”....and he has certainly proved also saying : “Our favorite holding period is forever.”.......AND....
1. Someone is sitting in the shade today because someone planted a tree a long time ago. – Warren Buffett
2. Risk comes from not knowing what you’re doing. – Warren Buffett
3. Predicting rain doesn’t count. Building arks does. – Warren Buffett
4. Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway. – W.Buffett
5. The first rule is not to lose. The second rule is not to forget the first rule. – Warren Buffett
AND ALL THIS from the man who "lost" about US $5 BILLION on the airlines he owned and then sold off ...wisely it seems !

Jerome Lander
December 23, 2021

To optimally diversify, you need to incorporate active management and alternatives, particularly when broader markets are very expensive and implying low return outcomes in future. Having too much dependency on the everything bubble driven by low rates and excessive debt is not sustainable should inflation pressures continue. It will likely end in tears. Buy and hold is a gamble from here and imprudent..

December 23, 2021

Jerome, you are quick to shoot down anybody who holds an alternate view to yours (or maybe it's just because they're competitors...).

Over the last 5 years, the best performing portfolio you have was about half the MSCI World index (circa 15% pa). So, if someone held a low cost global index fund they'd be well ahead than the positions you took.

Past performance is no indicator etc etc. But a low cost global fund is also not going to underperform itself (less the fees it charges).

I wish you the best but maybe try building others up instead of tearing them down.

December 23, 2021

I agree with you Brendan.The "buy and hold is a gamble........
If I had a $ for every time I have heard or been told that and believed it, I would probably be a lot worse off.
The recent $30K SPP for Macbank (MQG),leave it alone to compound for 30 to 35 years,use the DRP the full period.Have between 6-700 shares,unless they split them. Interesting to see what they would be worth,if it turns bad,sell them .

The forthcoming CSL SPP ,if it is S30K I don't think it will be scaled back.Pointless using the DRP for that,perhaps 1 share every 18 months.
For me I have to think for that,something I am out of practice doing.If I had 5 to 10 years I'm in for the full $30K.I don't know how much water is still to go under the bridge so perhaps look for a higher yielding company.
I'll probably find it difficult to break long term habits and more than likely get $30K worth of CSL


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