What is Vanguard forecasting for Australian stock and bond returns?

Anticipating some economic weakness in the months ahead in its 2023 midyear outlook, Vanguard Australia has shared its 10-year annualised return forecasts for local stocks and bonds. 

The investment manager noted that inflation remains sticky even as interest rates sit higher than expected due to tightening monetary policy to curb this pressure. Additionally, labour markets remain strong and wage pressures persist. 

Amid these economic factors, equity markets around the world generally have rallied strongly and, for most investors, the gains have reduced the expected returns of global equities excluding local markets.

The 10-year annualised return forecast for Australian stocks now sits between 4.3 per cent and 6.3 per cent. Ex-Australia stocks, it rises slightly at 5–7 per cent.

Moreover, Vanguard noted that bond markets worldwide also generally have recorded solid nominal gains since late 2022. Its 10-year annualised return forecast for Australian bonds is between 3.4 per cent and 4.4 per cent. Ex-Australia bonds, when hedged in Australian dollars, it is 3.6 per cent to 4.6 per cent. 

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The 2023 growth forecast for Australia sits at 1–1.5 per cent year over year, which has little changed from the start of the year.

“But tepid first-quarter growth and our expectation for subdued consumption in the coming quarters skew risks to the downside,” said Alexis Gray, Vanguard Australia’s senior economist.

“We place a 40 per cent probability of recession in the next 12 months — below that of many developed markets but still significant.”

Among Vanguard’s 2023 economic growth forecasts, China comes out on top at some 5.5–6 per cent, followed by Mexico at 1.8–1.9 per cent. Australia stands third in the list. 

In comparison, US markets are expected to see 0.75 per cent growth, Europe 0.5 per cent, and the outlook for the UK appears most bleak at 0 per cent. 

Vanguard Australia believes inflation in Australia has peaked, despite recent mixed signals, and its forecast of 4.5 per cent remains unchanged.

“Still, recent higher-than-expected inflation readings suggest higher interest rates will be required to dampen demand. We foresee inflation falling to the high end of the central bank’s 2–3 per cent target range only in late 2024 or 2025,” Gray added. 

“We foresee two more rate hikes, taking the rate target to 4.6 per cent by year end, higher by 25 bps (0.25 percentage point) than our view at the start of the year amid signs of sticky inflation.”