Stocktake: Vanguard: a lean decade ahead for stocks

The next decade isn't looking good for stock markets, says index fund giant Vanguard.

Global investors have done well over the last decade, mainly because US equities have soared, averaging annualised gains of 16.8 per cent. However, high valuations mean this will be “a decade unlike the last”, says Vanguard. Even after accounting for low rates and low inflation, US markets “have not been this overvalued since the dotcom bubble”.

The US won’t endure a lost decade, but lower returns – Vanguard expects nominal annualised returns of only 3.3 per cent – are likely. US growth stocks will do even worse, with Vanguard expecting flat returns.

Globally, the picture is better. Global stocks are “drifting close to overvalued territory”, but that’s mainly because of US valuations. Non-US developed markets are projected to deliver annualised gains of 5.3 to 7.3 per cent. Emerging markets should outperform the US but trail other developed markets, averaging annual gains of 4.2 to 6.2 per cent.

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“Opportunities exist”, says Vanguard, but the overall picture is discouraging. Returns on a 60/40 stock/bond portfolio will likely be half of what investors realised over the last decade. As for global stocks, Vanguard is projecting the lowest 10-year returns since the early 2000s.