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Quarterly Economic Commentary – Q4 2019

Over the last three months, the UK economy has remained subdued as Brexit-related uncertainty has continued to affect business and consumer sentiment. Growth rose at a slower rate than expected in Q3 and is forecast to grow modestly in Q4, while survey data points to a continued deepening of the manufacturing recession. The result of the general election has slightly reduced uncertainty in the near-term as prospects over a Brexit agreement seem to have improved. The Bank of England kept interest rates on hold at 0.75% in December.

Economic activity has remained weak in the euro area, as manufacturing production has continued to contract, with tentative evidence of a spillover into the services sector. Germany remains a key drag on euro area growth, narrowly avoiding a recession in Q3. However, more forward-looking indicators and a perception that trade and policy uncertainty is diminishing, suggest the euro area outlook is improving.

The European Central Bank left interest rates unchanged at -0.50% in December and maintained its quantitative easing programme at a rate of 20 billion euros per month.

The US economy has remained fairly robust over the last quarter, with economic data indicating a resilient labour market and an improving housing market. Business investment has continued to slump, and survey data has been weak. Global trade tensions with China seem to have lowered in the near-term, as a ‘phase-one’ deal was struck between the two nations, encouraging bilateral trade. The Federal Reserve cut its key interest rate once in the last three months. The range of the Fed funds rate is now between 1.50% and 1.75%.

The Chinese economy has continued to slow as domestic demand has remained muted, and elevated geopolitical uncertainty has hindered the effectiveness of stimulus. Growth has slowed to 6.0% YoY in Q3, down from 6.2% YoY in Q2, however, the ‘phase-one’ deal struck with the US presents an upside risk to growth.

Our view remains that the era of uncertainty is here to stay, despite the recent positive headline developments.

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

Other important information:

This document is designed for use by and is directed only at persons resident in the UK.

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

Vanguard Asset Management, Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of any investment, please contact your financial adviser.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2020 Vanguard Asset Management, Limited. All rights reserved.

Reference number: 1045689

Key takeaway

What should investors do in response to these developments? Many investors change their portfolios in a bid to take advantage of the latest news. However, it’s very difficult to time these changes effectively.

In practice, shifting your portfolio in response to short-term events may lead to little more than increased trading costs.

It’s easy to be swayed by the latest developments in the markets or the economy, manager ratings or the performance of an individual security or strategy. However, instead of getting caught up in the investment noise, we believe that we stand a better chance of success if we remain focused on the things that we can control.

Our Investment Beliefs guide our principles for investment success.

Our Investment Beliefs

Market Performance

Vanguard Lifestrategy Performance

It’s all about time in the market not market timing

It’s natural to be concerned when markets fall, even temporarily. After all, nobody wants to lose money. This is why some people try to time the market.

Timing the markets involves trying to second-guess the ups and downs, with the hope that you will buy when prices are low and sell when they are high. Of course, this can be lucrative if you get it right consistently, but this is very difficult to do and getting it wrong means locking in losses and missing out on gains.

Not only is timing the market difficult to get right, it also poses the risk of missing the ‘good’ days when share prices increase significantly. Historically, many of the best days for the stock markets have occurred during periods of extreme volatility.

Anybody who pulls money out in the early stages of a volatile period could miss these good days, as well as potentially locking in some losses. For instance, between May 2008 and February 2009 in the depths of the global financial crisis the MSCI World index dropped by -30.4%. By the end of 2009 it had bounced back +40.8%.

Instead of trying to time the market, we believe that spending time in the market is more likely to give you good returns over the long term. We base our investment decisions on the long-term fundamentals rather than short-term market noise.

Of course, this means experiencing the bad days as well as the good days, but markets and wider economies tend to go up over time. This applies to everything from share prices to the price of goods.

For instance, the MSCI World index has delivered average annual returns of +10.9% since it was launched in 1969. We believe that successful investing requires patience and taking a long-term view and being comfortable riding out the short-term ups and downs for the chance of a much better return over longer periods of time.


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