Global investment behavior in an increasingly uncertain environment April 2017 Joe Davis Vanguard Investment Strategy Group
Vanguard Investment Strategy Group
Agenda
Global business investment:
U.S. investment:
Financial markets:
Perplexingly frail
Stronger than some think, but reflation unlikely
Most guarded outlook since 2006
2
Vanguard Investment Strategy Group
Global investment: Perplexingly frail Fixed investment has fallen globally in the aftermath of the financial crisis
Sources: Penn World Table 9.0; IMF, World Economic Outlook; and IMF staff estimates 3
Vanguard Investment Strategy Group
U.S. investment backdrop Business investment is not “low�, although it has stagnated of late
14% 13% 12%
Investment % of GDP
11% 10% 9% 8% 7% 6% 5% 4% 1947
1954
1962
1970
1978
1985
1993
2001
2009
2016
Source: U.S. Census Bureau. Notes: Chart depicts real nonresidential business investment as a percentage of real GDP 4
Vanguard Investment Strategy Group
Shifting global dynamics playing a role in the investment conundrum Digital economy
150
Nominal level investment (2007 = 100)
140 130
EM secular slowdown
120
Technology headwinds? 110 100 90 80 70 60 50 98
00
02
04
06
08
10
12
14
16
Structures Equipment Intellectual Property
Source: Moody’s Analytics. Notes: Data indexed to 12/31/2006. Data represents real investment figures 5
Vanguard Investment Strategy Group
The dark side of Moore’s Law 1.30
26
1.25
25
1.20
24
1.15
23
1.10
22
1.05
21
1.00
20
0.95
19 1980
1985
1990
1995
2000
2005
2010
Relative price of investment (left scale) Investment value (percent of GDP; right scale)
Source: Vanguard calculations based on data from the Bureau of Economic Analysis and the IMF. 6
Vanguard Investment Strategy Group
U.S. investment backdrop Contribution to GDP has been particularly soft amid a strengthening economic backdrop
Contribution to % change in real GDP since 2000
1.00
0.50
median 0.00
Avg 2015 - 2016 -0.50
-1.00
-1.50 Equipment
Structures
Intellectual property
Source: Moody’s Analytics. Notes: Data represents investment contribution to real GDP 7
Vanguard Investment Strategy Group
Animal spirits? Will high optimism persist and translate into hard numbers? Our view is probably not
NFIB Optimism Index (1986 = 100)
110
A) Persistent high optimism
105
100
B) Reflation hopes fade 95
90
85
80 1986
1989
1993
1997
2001
2004
2008
2012
2016
2018
Source: National Federation of Independent Businesses. Notes: A and B series represent potential scenarios of NFIB Optimism Index level over the next 4 quarters 8
Vanguard Investment Strategy Group
Recovery endures, but unlikely to accelerate in 2017 Investment rebound needed to spur above trend GDP growth
GDP = 3.1 3.0
Contribution to % change in real GDP
GDP = 2.0-2.5 2.5 GDP = 1.9 2.0
1.5
1.0
0.5
0.0 2016 actual
Scenario A: Persistent high optimism
Scenario B: Vanguard base case
Business investment Remaining GDP components (held constant)
Source: Moody’s Analytics and proprietary calculations from Vanguard Global Economics Team. Notes: scenarios A and B represent 117 bps and 62 bps of nonresidential business investment respectively 9