Investors have focused on both China’s economic slowdown and the decline of oil and other commodity prices as stock markets have generally slumped since the summer.
In the most recently published Vanguard fund reports, which over the 12 months ended January 31, 2016, some of the advisors who manage Vanguard funds provided their perspective and expertise on what’s driving and draining the markets.
“From our perspective, the global investment narrative is slowly coalescing around a single dominant theme: China,” wrote Wellington Management Company LLP’s Donald J. Kilbride, the portfolio manager for Vanguard Dividend Growth Fund. “This should come as no surprise. Not only is China the world’s second-largest economy, but it also has been the dominant source of incremental global growth for much of the last decade. China’s fortunes have had a profoundly positive impact on markets for some time. Yet it was clear that its eventual slowdown would have an equally profound impact.
“Global markets, including commodities, equities, and currencies, continued to swoon in the face of China’s weakness. Complicating the matter is a lack of confidence about the data. Is the country’s growth rate slowing from 10% to 7%, as the official data would suggest? Or is the slowdown far more severe?”
Along with China, Mr. Kilbride touched on other issues that may influence the financial markets in 2016.
“Other factors are likely to weigh on markets in the next year.” Mr. Kilbride wrote. “They include the U.S. presidential election; oil prices; global central bank policy, interest rates, and currencies; and geopolitical strife. These are only a few of the factors. Our central view remains one of caution, as many of these factors appear to be challenges to healthy economic activity and healthy markets.”
The Dividend Growth Fund invests in the stocks of companies that Mr. Kilbride and his team believe will “steadily and reliably grow their dividend payments.” A long-term view is essential to the fund’s strategy and success.
Long-term view is essential
“Whatever view we may have over the next month, year, or even five years will have little bearing on our portfolio decisions,” Mr. Kilbride said. “We continue to believe in the power of compounding as expressed by a growing dividend. We consider time our friend, whereas many investors regard it as the enemy. We believe that a long-term outlook characterized by patience and low turnover is our best recipe for managing the fund. We stay true to our process and believe that the Dividend Growth Fund is well-positioned to deliver superior dividend growth and solid capital appreciation to shareholders over time.”
The decline in commodity prices has been particularly hard on Vanguard Precious Metals and Mining Fund, which invests in companies that focus on mining or exploring for precious or rare metals and minerals.
Confident amid challenges
M&G Investment Management Limited’s Jamie J. Horvat, the portfolio manager for the Precious Metals and Mining Fund, offered investors insight into the fund’s approach.
“Recent years have been challenging, but we remain confident in our investment philosophy and process. We will maintain our long-term approach of identifying high-caliber management teams extracting the greatest value from best-in-class assets, positioned at the lower end of the cost curve,” Mr. Horvat wrote. “This approach should drive returns in the months to come. Companies are in a strong position to benefit from rising prices, macroeconomic tail risks make gold an attractive insurance play, and the current supply/demand dynamic should allow for strong free cash flows.”
The past few months have reminded investors that markets can disappoint as well as delight. In his closing remarks in letters to shareholders, Vanguard Chairman and CEO Bill McNabb offered some guidance for investing in an environment when growth is expected to be “frustratingly fragile,” according to our global economists.
Control what you can
“I’ve often encouraged shareholders to focus on the things they can control. That advice holds true today,” Mr. McNabb wrote. “Consider saving more than you think you may need. That’s one way you can prepare for the volatility that may lie ahead, particularly as markets adjust to changes in policies from the Fed and other central banks.”
Other recently published reports:
Vanguard Corporate Bond Funds
Vanguard Energy Fund
Vanguard Health Care Fund
All investing is subject to risk, including the possible loss of the money you invest.
Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.
Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.