Global Investment Behavior in an Uncertain Environment

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

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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

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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

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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

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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

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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

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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

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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