Vanguard's Latest Guesses

[GeoffF100]

Vanguard’s 10 year expectations:

UK Shares 4.5%-6.5%
Global ex UK shares 5.8%-7.8%
UK bonds 4.3%-5.3%
Global ex UK bonds (GBP hedged) 4.3%-5.3%

(All nominal, i.e. not allowing for inflation.)

https://www.vanguardinvestor.co.uk/arti ... -challenge

[wanderer]

Opposite that then a 5yr fixed savings account at 5.5% looks pretty attractive!

[vand]

Think they're a bit too pessimistic, TBH.

They are basically saying the market hasn't priced in any equity risk premium, despite over the last 6 months FTSE moderating by high single digits, while fixed income has gone to a peak.

[NotSure]

Think they're a bit too pessimistic, TBH.

They are basically saying the market hasn't priced in any equity risk premium, despite over the last 6 months FTSE moderating by high single digits, while fixed income has gone to a peak.

FI has gone to a peak?

FI has tanked. Do you mean yields have peaked? If so, for FI, the only way is up?

IMHO, the effect of this is not yet been reflected in equities.

[vand]

Think they're a bit too pessimistic, TBH.

They are basically saying the market hasn't priced in any equity risk premium, despite over the last 6 months FTSE moderating by high single digits, while fixed income has gone to a peak.

FI has gone to a peak?

FI has tanked. Do you mean yields have peaked? If so, for FI, the only way is up?

IMHO, the effect of this is not yet been reflected in equities.

Yes, I mean FI forward returns have gone towards new highs. These are risk-free gauranteable returns. It's unlikely the stock market hasn't taken the bond market into account and priced itself accordingly. Historically stocks are priced to return 2-4% above bonds to compensate for the higher risk of holding equity. No reason to suspect the relationship has broken down.

[NotSure]

FI has gone to a peak?

FI has tanked. Do you mean yields have peaked? If so, for FI, the only way is up?

IMHO, the effect of this is not yet been reflected in equities.

Yes, I mean FI forward returns have gone towards new highs. These are risk-free gauranteable returns. It's unlikely the stock market hasn't taken the bond market into account and priced itself accordingly. Historically stocks are priced to return 2-4% above bonds to compensate for the higher risk of holding equity. No reason to suspect the relationship has broken down.

Well, I hope you are correct (I own more stocks than bonds ). However, risk free reward has gone from 0% to 5 or 6%. I'm not convinced this has been reflected in equities, but fingers crossed

[EthicsGradient]

Remember that the Vanguard guesses are over 10 years, not the 5 that savings rates go out to. There is still a small risk premium in UK shares over UK bonds in the Vanguard guesses.

[Dod101]

Opposite that then a 5yr fixed savings account at 5.5% looks pretty attractive!

But that presupposes that the current base rate will be in place for 10 years.

It is of course pure speculation and not to be taken seriously.

Dod

[GeoffF100]

Think they're a bit too pessimistic, TBH.

They are basically saying the market hasn't priced in any equity risk premium, despite over the last 6 months FTSE moderating by high single digits, while fixed income has gone to a peak.

Their model is saying the opposite: the market has priced in too much risk premium, i.e. equities are currently expensive relative to bonds.

[GeoffF100]

Opposite that then a 5yr fixed savings account at 5.5% looks pretty attractive!

You need to look at 10 year rates. Nonetheless, if equities are expensive and bonds are cheap, there is a case for dumping equities in favour of bonds:

https://www.youtube.com/watch?v=7JvLRb5zU2c

Vanguard advocates leaving that judgement to Mr Market and holding both equities and bonds, in a proportion that is appropriate to your risk tolerance and capacity to absorb risk.

[vand]

Think they're a bit too pessimistic, TBH.

They are basically saying the market hasn't priced in any equity risk premium, despite over the last 6 months FTSE moderating by high single digits, while fixed income has gone to a peak.

Their model is saying the opposite: the market has priced in too much risk premium, i.e. equities are currently expensive relative to bonds.

https://www.investopedia.com/investing/ ... k-premium/

Estimate the expected return on stocks.
Estimate the expected return on risk-free bonds.
Subtract the difference to get the equity risk premium.

In their example

Step Estimated Long-Term Return
1. Real stock returns 3.7% to 4.7%
2. Subtract real bond returns -1.7%
3. Estimated equity risk premium +2.0% to 3.0%

[GeoffF100]

Vanguard's numbers imply equity risk premiums of:

5.5% - 4.8% = 0.7% for the UK, and
6.8% - 4.8% = 2% for global ex UK.

The long term values over 300 years for the UK and 225 years for the US (the two most long lived markets over an unprecedented period of economic growth) are both about 3%:

https://globalfinancialdata.com/300-yea ... sk-premium

Nonetheless, as Figures 3 and 4 show, the actual 10 year premiums were all over the place, but were usually positive for equities.

Given current valuations and the economic outlook, I do not think Vanguard's estimates are pessimistic, but nobody knows what the returns will actually be.