Technology, Demographics, and Globalization will Drag Down Global Growth and Returns

Technology, Demographics, and Globalization will Drag Down Global Growth and Returns

How Technology, Demographics, and Globalization will Drag Down Global Growth and Returns Over the Next Decade by John Szramiak was originally published on Vintage Value Investing

We’re in one of the longest bull markets of all time, following one of the worst economic recessions of all time. However, this economic recovery has also been one of the slowest of all time.

Since the global financial crisis, the global recovery has continued to be very modest and – at times – frustratingly fragile. In the United States, for example, the economy has grown at an average annual rate of about 2.00%, whereas growth since 1950 has averaged an annual rate of 3.25%.

ValueWalk’s December 2021 Hedge Fund Newsletter: Hedge Funds Avoid Distressed China Debt

InvestWelcome to our latest issue of issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring hedge funds avoiding distressed china debt, growth in crypto fund launches, and the adapting venture capital industry. Q3 2021 hedge fund letters, Read More

Based on market and economic conditions, Vanguard’s outlook for the equity and fixed income markets is the most guarded it has been in ten years.

Read: Vanguard’s Economic and Stock Market Outlook for 2017

The below article was adapted from an infographic that was posted on Vanguard’s official blog. Keep reading to learn:

  1. How technology, demographics, and globalization are restraining global growth;
  2. What that means for expected returns over the next decade;
  3. How different portfolios are expected to fare under different economic scenarios.

Download a copy of the Vanguard infographic below or keep reading!

1. What are the structural forces dampening global growth and interest rates?

Technological disruption, unfavorable demographics, and expanding globalization – forces at work since the 1980s – are likely to keep growth and interest rates low by historical standards. Below are examples of what these structural forces look like in everyday life:

  • Technology: Falling technology costs are reducing the amounts businesses are spending on capital. An economy with fewer factories and brick-and-mortar stores, but more apps and online spending, can lead to lower capital spending.
  • Demographics: Aging populations are weighing on growth in the developed world. Economies with younger populations buy more consumer goods, whereas old populations spend less and save more, which can produce a a savings glut.
  • Globalization: The free movement of capital and products is increasing competition on prices and labor. Increased trade makes use of comparative advantages in production, which translates into cheaper labor and cheaper goods. The end result? Lower inflation.

Together, these structural forces have contributed to the current economic environment of historically low growth and interest rates and will continue to do so in the years ahead.

2. What are the implications for your returns over the next decade?

Vanguard’s outlook for global stocks and bonds remains the most guarded it has been in ten years, given that interest rates are unlikely to rise substantially and that current valuations are stretched.

Expected return ranges are:

  • Fixed Income: 1.5%-2.5% (“Positive but muted”) compared to average global bond returns of 5.4% in 1926-2016.
  • Equity: 5%-8% (“Still guarded, but not bearish”) compared to  average global stock returns of 10.0% in 1926-2016.

Vanguard Return Expectations - Vintage Value Investing

3. How would different portfolio construction strategies fare in various economic scenarios?

Given Vanguard’s global outlook, the charts below examine three yield-curve scenarios over the next five years and the effectiveness of various portfolio strategies designed for specific scenarios.

  • A long duration portfolio (60% long-term Treasury index, 30% U.S. equity, and 10% global equities and bonds) performed best in a low-yield scenario.
  • 60/40 diversified portfolio (60% diversified equity, 40% diversified bonds) performed best in a moderate-yield scenario.
  • short duration portfolio (60% diversified equity, 40% bonds skewed toward short-term credit) performed best in a high-yield scenario.

The key takeaways here are that (1) portfolios designed for extreme scenarios involve important trade-offs, and (2) the diversified portfolio works best for investors who do not have a strong conviction about the future state of the economy.

Updated on

Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…
Previous article How World War I ushered in the century of oil
Next article Indexing Bias

No posts to display