vanguard’s economic and investment outlook · vanguard global dashboard of leading economic...

FOR FINANCIAL ADVISOR USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

Vanguard’s economic and investment outlook Canada 2016

2 FOR FINANCIAL ADVISOR USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

Key economic/portfolio points

Convergence to slower global growth Cautious central banks = slow rate of normalization Manage return expectations lower


Vanguard global dashboard of leading economic indicators and implied economic growth for 2016

Canada: Economic indicators Estimated distribution of Canada’s growth outcomes, 2016

Odds of a slowdown:

48%

Odds of an acceleration:

23%

Trend growth:

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0%

25%

50%

75%

100%

Rea

l GD

P gr

owth

(yea

r-ov

er-y

ear)

Indi

cato

rs a

bove

/bel

ow tr

end

Below trend and negative momentum: Commodities, Housing

Below trend and positive momentum: Financial markets and Labor market

Above-trend growth: Manufacturing, Consumer confidence

Real GDP year-over-year (at right)

20%

28% 29%

17%

6%

0%

10%

20%

30%

40%

50%

Recession:Less than

0%

Stagnation: 0to 1.5%

Status Quo:1.5% to

3.0%

CyclicalRebound:3.0% to

4.5%

Acceleration:More than

4.5%

Prob

abilit

y

Notes: Distribution of growth outcomes generated by bootstrapping the residuals from a regression based on a proprietary set of leading economic indicators and historical data, estimated from 1960 to 2015 and adjusting for the time-varying trend growth rate. Sources: Vanguard calculations, based on data from Moody's Analytics Data Buffet and Thomson Reuters Datastream.


If consumers de-lever, fiscal expansion can support growth… in the short term

Households unlikely to drive growth Room for fiscal expansion

0%

20%

40%

60%

80%

100%

120%

Median Debt to Income Median Debt to Assets

Rat

io (%

)

19992012

Source: Vanguard calculations based on data from Statistics Canada and the International Monetary Fund (IMF).

0%

10%

20%

30%

40%

50%

60%

70%

80%

Canada Developed Market Average

Rat

io (%

)

General Government Net Debt/GDP


Slowdown in housing would be impactful… in regions where it occurs

Sensitivity to a 1% change in housing and related services

0.0 0.1 0.2 0.3 0.4

Consumption

Investment

GDP

Percentage points

Notes: Scenarios are estimated using an augmented input-output model. Housing sector is proxied by real estate and related services. Latest available input-output table in Canada is the 2012 table released by the OECD. Sources: Vanguard calculations based on data from Statistics Canada, Moody’s Analytics Data Buffet, Organisation for Economic Co-operation and Development, and U.S. Bureau of Economic Analysis.


Weaker Canadian dollar should improve trade with largest partner: The United States

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1980 1984 1988 1992 1996 2000 2004 2008 2012

Canadian dollar per U.S. dollar

Source: Thomson Reuters Datastream.


A scorecard for growth convergence

United States

Euro area China Japan United

Kingdom Canada Australia

Percentage of world GNP 22.4% 17.1% 13.3% 6.2% 3.7% 2.3% 1.9%

Estimated trend growth rates (%) Pre-recession average (1990-2007) 3.0 2.0 10.0 1.4 2.9 2.5 3.4 Projected future (2016-2020) 2.1 1.1 6.3 1.5 2.1 2.0 2.8

Growth headwinds Slowing growth of labor force Slower population growth and aging of population Private sector debt deleveraging Debt-deleveraging cycle, constraining willingness to spend Sluggish capital investment Falling cost of technology and demographic effects on businesses’ growth plans Fiscal sustainability and committed austerity Unsustainable debt dynamics may result in suboptimal policies and uncertainty Commodity exports dependency Weak commodity price outlook Currency strength Tighter financial conditions, weaker manufacturing and exports Rising income inequality Falling purchasing power of consumers with highest propensity to spend

Notes: Slowing growth of labor force: Birth rates minus mortality rates (slope of the trend line, 1960–present); Private-sector debt deleveraging: Percentage increase in household debt (% of GDP) from 2008 to December 2015; Sluggish capital investment: Difference between average fixed capital formation as percentage of GDP, 2000–2007 and 2008–latest; Fiscal sustainability and committed fiscal austerity: Fiscal space estimates based on Moody’s Economy.com model, as of February 2015 and difference in structural government budget balance over next two years (2016–2017); Commodity exports dependency: Qualitative assessment of commodity export dependence; Currency strength: Level of real effective exchange rate as of September 2015 (>100, overvalued/<100, undervalued); Rising income inequality: Average percentage point change in the income share of top 1% of income (1980–2010). Also, for China, we factor local government debt into our debt deleveraging rating. Sources: Vanguard calculations, based on data from International Monetary Fund (IMF)—World Economic Outlook, Organisation for Economic Co-operation and Development ,United Nations, U.S. Bureau of Economic Analysis, U.S. Federal Reserve System, Moody’s Analytics, and Thomson Reuters Datastream.

Negative factor Positive factor Neutral factor


0%

1%

2%

3%

4%

5%

6%

7%

2000-2015 2016-2020

Annu

aliz

ed G

DP

grow

th

Emerging marketsDeveloped markets

Convergence

Structural deceleration = growth convergence

Demographic headwinds Narrowing growth gap

0.35%

0.45%

0.55%

0.65%

0.75%

1.00%

1.50%

2.00%

2.50%

3.00%

1980-2000 2000-2015 2015-2020

Perio

d av

erag

e gr

owth

rate

(ann

ual)

Perio

d av

erag

e gr

owth

rate

(ann

ual)

Emerging markets (left axis)Developed markets (right axis)

Notes: Population growth and potential GDP data and projections based on IMF estimates of output gap and real GDP growth by country. Developed and emerging market group totals estimated as GDP-weighted average of individual countries. Groupings follow IMF designation. Sources: Vanguard, based on data from International Monetary Fund—World Economic Outlook, October 2015.



United States: Economic indicators Estimated distribution of U.S. growth outcomes, 2016

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0%

25%

50%

75%

100%

1998 2000 2002 2004 2006 2009 2011 2013 2015

Rea

l GD

P gr

owth

(yea

r-ov

er-y

ear)

Indi

cato

rs a

bove

/bel

ow tr

end

Below trend and negative momentumBelow trend and positive momentumAbove-trend growthReal GDP Year-over-Year (right)

14%

19%

39%

17%

11%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Recession:Less than

0%

Stagnation:0 to 1%

Trend:1% to 2.5%

CyclicalRebound:

2.5% to 3.5%


3.5%

Prob

abilit

y

Above-trend growth: Housing, consumer confidence, labor Below trend, but positive momentum: Financial markets, consumer credit Below trend and negative momentum: Manufacturing

Notes: Distribution of growth outcomes generated by bootstrapping the residuals from a regression based on a proprietary set of leading economic indicators and historical data, estimated from 1960 to 2015 and adjusting for the time-varying trend growth rate. Sources: Vanguard calculations, based on data from Moody’s Analytics Data Buffet, U.S. Bureau of Economic Analysis, and U.S. Federal Reserve.

Odds of a slowdown:

33%


28%

Trend growth:


From cyclical thrust back to trend growth

Convergence in real GDP growth Convergence in employment growth

-3

-2

-1

0

1

2

3

4

2002-2007 2008-2009 2010-2013 2014-2015 2016-2017

Aver

age

annu

al g

row

th ra

te p

er p

erio

d (p

erce

ntag

e)

U.S. potential GDP GrowthU.S. real GDP growth

-300

-200

-100

0

100

200

300

2002-2007 2008-2009 2010-2013 2014-2015 2016-2017

Aver

age

mon

thly

cha

nge

per p

erio

d (th

ousa

nds

of w

orke

rs)

Labor Force growthEmployment growth

Notes: Potential GDP growth represents Congressional Budget Office (CBO) estimates; real growth represents data provided by U.S. Bureau of Economic Analysis through third-quarter 2015. U.S. real GDP growth is assumed to return to potential over 2016–2017. Labor force growth represents historical average monthly change in labor force; 2016–2017 period represents estimate using population growth estimates and assumes constant participation rates within age cohorts. Employment growth is assumed to return to trend in labor force growth over 2016–2017. Sources: Vanguard calculations, based on data from Congressional Budget Office, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, and Moody’s Analytics Data Buffet.


Deconstructing Vanguard’s view of “dovish tightening” in interest rates

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2015 2016 2017 2018 Long run

Fede

ral f

unds

rate

Federal funds rateVanguard expectationISG Recession/No recession

Average projection: Weighted average of 0% and 3% assuming a probability of recession

Extended pause at 1%: • Limits USD strength and

manufacturing recession • Reducing balance-sheet • Ensures negative real FFR

Notes: Purple dots represent median expectation at stated year-end from U.S. Federal Reserve Board’s September 2015 Summary of Economic Projections. Green line represents Vanguard’s estimate of appropriate Fed policy adjusted for probability of recession in any one year beginning in 2018. Blue dashed lines represent binary outcomes of recession (line approaching and remaining at zero) or no recession (line approaching and remaining at 3%). FFR = federal funds rate. Sources: Vanguard calculations, based on data from Federal Reserve Board.

Fed dots too high: • Structural deceleration

consistent with 3% nominal FFR • 4% historical average biased

upwards by 1980-2000 period


16%

23%

29%

22%

10%

0%

10%

20%

30%

40%

Recession:Less than

0%

Stagnation:0% to 1%

Trend:1% to 2%

Cyclicalrebound:2% to 3%


3%

Prob

abilit

y


Euro area: Economic indicators Estimated distribution of euro area’s growth outcomes, 2016

Odds of a slowdown:

39%


32%

Trend growth:

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0%

25%

50%

75%

100%

Rea

l GD

P gr

owth

(yea

r-ov

er-y

ear)

Indi

cato

rs a

bove

/bel

ow tr

end

Below trend and negative momentum: Manufacturing,business sentimentBelow trend and positive momentum: Financial conditions,household savingsAbove-trend growth: Lending to households, retail trade

Real GDP year-over-year (at right)

Notes: Distribution of growth outcomes generated by bootstrapping the residuals from a regression based on a proprietary set of leading economic indicators and historical data, estimated from 1960 to 2015 and adjusting for time-varying trend growth rate. Sources: Vanguard calculations, based on data from Eurostat, Destatis (Federal Statistical Office of Germany), French National Institute of Statistics and Economic Studies (INSEE), Italian National Institute of Statistics (ISTAT), Instituto Nacional de Estadistica (INE, Spanish Statistical Office), Statistics Netherlands (CBS), and Thomson Reuters Datastream.


Europe growing; QE helped

Euro area inflation will take some time to reach it’s target

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2014 2015 2016 2017

Perc

ent

ECB forecast uncertainty upper and lower boundsEuro Area HICP All Items (Forecast)Germany HICP (Forecast)5-year/5-year forward inflation expectation (1.8%)

Notes: Forecast lines are constructed using ECB and Bundesbank forecast data at annual intervals over the next two years. All forecasts are smoothed over a six-month period. HICP = harmonised index of consumer prices. Sources: Vanguard calculations, based on data from Bank of England, ECB (European Central Bank), Eurostat, German Federal Statistical Office (Statistisches Bundesamt), Bloomberg, Bundesbank, Bank for International Settlements, Macrobond, and Moody’s Analytics.

ECB Inflation Target, 2%


14%

22%

35%

21%

8%

0%

10%

20%

30%

40%

50%

Hard landing:Less than

5%

Slowdown:5% to 6%

Trend:6% to 7%

Acceleration:7% to 8%

Accelerationto

pre-crisistrend:

Above 8%

Prob

abilit

y


China: Economic indicators Estimated distribution of China’s growth outcomes, 2016

Notes: Distribution of growth outcomes generated by bootstrapping the residuals from a regression based on a proprietary set of leading economic indicators and historical data, estimated from 1990 to September 2015 and adjusting for the time-varying trend growth rate. “Target growth” is the 2016 growth target set by Chinese officials. Sources: Vanguard calculations, based on data from Moody’s Analytics Data Buffet, Thomson Reuters Datastream, and CEIC.

Odds of a slowdown:

36%


29%

Trend growth:

0%

2%

4%

6%

8%

10%

12%

14%

16%

0%

25%

50%

75%

100%

Rea

l GD

P gr

owth

(yea

r-ov

er-y

ear)

Indi

cato

rs a

bove

/bel

ow tr

end

Below trend and negative momentum: Manufacturing, financialconditions, commodity marketsBelow trend and positive momentum: Sentiment, housing,consumption, labor marketAbove-trend growth:

Real GDP year-over-year (right)


0%

2%

4%

6%

8%

10%

12%

5,000 10,000 15,000 20,000 25,000 30,000

Annu

al re

al G

DP

grow

th

GDP per capita (USD)

Chinese growth slowing as they transition

Unfavourable demographic and fading of catching-up effect suggest that potential growth is falling

Historical real GDP growth versus GDP per capita for various Asian economies

China 2002-2003

China 2009-2010

China 2014

China 2019

Notes: Chart illustrates real GDP growth rates against GDP per capita for China (for the years shown) and for Hong Kong, Japan, Taiwan, South Korea, and Singapore (represented by the blue “bars and whiskers”) for 1951–November 2014. For each level of GDP per capita, we calculated distribution of real GDP growth rates across the five Asian economies. China 2014 and 2019 forecasts represent data from IMF World Economic Outlook (WEO), October 2014. Sources: Vanguard calculations, based on data from Penn World Tables (version 8.0 for 1951–2011) and IMF WEO, October 2014.growth rates across the five Asian economies.

Percentiles key:

95th

25th

75th

5th

Median

0

1

2

3

4

5

6

7

8

80's 90's 2001-07 2008-11

Labor Capital stock Total Factor Productivity

Sources: Vanguard calculations ,based on data from the Penn World Tables 8.0. (period 1951–2011) and IMF – WEO, October 2014.


Projected global fixed income ten-year outlook

VCMM-simulated distribution of expected average annualized nominal return of total fixed income market as of September 2015 and June 2010

0%

5%

10%

15%

20%

25%

Less than 1% 1 to 1.5% 1.5 to 2% 2 to 2.5% 2.5 to 3% 3 to 3.5% 3.5 to 4% 4 to 4.5% More than4.5%

Prob

abilit

y

10-year annualized return

Current 10-year outlookOutlook as of June 2010

Global bond returns 1970-2015 8.7% 2000-2015 5.6%

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model™ (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM, derived from 10,000 simulations for global equity returns and fixed income returns in CAD. Simulations as of September 30, 2015. Results from the model may vary with each use and over time. For more information, please see the Important information slide. Note: Figure displays projected range of returns for a 25% Canada, 75% ex-Canada bond portfolio in CAD, rebalanced quarterly. Source: Vanguard.


Low rates are secular, not cyclical

Note: 10-year Treasury yield projections based on 10,000 simulations from VCMM as of September 2015. Sources: Vanguard calculations, based on data from Robert Shiller website, at aida.wss.yale.edu/~shiller/data.htm.

History Forecast

Projection percentiles

95th

75th 50th 25th

5th 0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

3/31/1871 3/31/1891 3/31/1911 3/31/1931 3/31/1951 3/31/1971 3/31/1991 3/31/2011

Yiel

d

10 year U.S. Treasury Yield 10 year Canadian Govt bond yield 5th / 95th 25th / 75th 50th


Projected global equity ten-year return outlook

VCMM-simulated distribution of expected average annualized nominal return of global equity market, estimated as of September 2015 and June 2010

0%

5%

10%

15%

20%

25%

Less than 0% 0 to 3% 3 to 6% 6 to 9% 9 to 12% 12 to 15% 15 to 18% More than 18%

Prob

abilit

y

10-year annualized return

Current 10-year outlook Outlook as of June 2010

Global equity returns 1970-2015 8.8% 2000-2015 3.5%

IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM, derived from 10,000 simulations for global equity returns and fixed income returns in CAD. Simulations as of September 30, 2015. Results from the model may vary with each use and over time. For more information, please see the important information slide. Notes: Figure displays the projected range of returns for a 25% Canada, 75% ex-Canada equity portfolio in CAD, rebalanced quarterly. Source: Vanguard.


Traditional CAPE is below Vanguard’s model

CAPE versus estimated fair-value CAPE

0

10

20

30

40

50

60

70

1979 1984 1989 1994 1999 2004 2009 2014

Pric

e / e

arni

ngs

ratio

FV CAPE + / - 1 STD ErrorFV CAPE (MSCI Canada Index)CAPE (MSCI Canada Index)

Notes: “Fair-value CAPE” is based on statistical model that corrects CAPE measures for the level of inflation expectations and for interest rates. The statistical model specification is a five-variable vector error correction (VEC), including equity earnings-yield (MSCI Canada), Canadian ten-year trailing inflation, ten-year Canadian Government Bond yield, and ten-year trailing equity and bond volatility estimated over the period January 1970 – September 2015. Source: Vanguard calculations, based on data from Thomson Reuters DataStream, FactSet, MSCI, Statistics Canada, and Bank of Canada.

Long-term CAPE


20%/80% 60%/40% 80%/20%

History 1971-2015History 2000-2015

Projected 10-year nominal return outlook for balanced portfolios

-5%

0%

5%

10%

15%

20%

1980 1985 1990 1995 2000 2005 2010

20/80: 10 year Annualized Return60/40: 10 year Annualized Return80/20: 10 year Real Annualized Return

History Forecast

10-y

ear a

nnua

lized

retu

rns

IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modelled asset class. Simulations are as of September 30, 2015. Results from the model may vary with each use and over time. Note: Forecast displays 5th/25th/75th/95th percentile ranges of 10,000 VCMM simulations for projected nominal returns for balanced portfolios in CAD. The equity portfolio is 25% Canadian equity and 75% global ex-Canada equity. The bond portfolio is 25% Canadian bonds and 75% global ex-Canada bonds. Source: Vanguard.

FOR FINANCIAL ADVISOR USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

Appendix


Emerging markets’ financial system are much different today

Crisis Years External debt stocks (% of GDP)

Total reserves (% of total external debt)

External debt service (% exports)

Total reserves/ Current account deficit

Currency peg in place (yes or no)

Brazil 2002 48 16 71 5 No

Hungary 1997 52 36 33 Less than 1 Yes

Malaysia 1997 36 44 7 4 Yes

Mexico 1994 34 5 27 Less than 1 Yes

South Africa 1997 20 16 17 2 No

Turkey 1997 32 22 22 7 No

Argentina 2001 57 10 49 4 Yes

Indonesia 1997 52 12 30 3 Yes

Russia 1998 65 6 29 56 Yes

South Korea 1997 32 13 — 8 Yes

Today

Brazil 21 74 29 4 No

Hungary 147 24 97 8 No

Malaysia 68 63 4 4 No

Mexico 35 40 10 7 No

South Africa 38 32 8 2 No

Turkey 47 29 29 2 No

Argentina 22 21 14 6 No

Indonesia 30 37 19 3 No

Russia 35 70 32 15 No

South Korea 32 83 — 53 No

Notes: Data for external debt service as percentage of exports for Hungary and Russia begin in 2005. Data for total reserves as percentage of exports for Hungary begin in 2000. Sources: Vanguard calculations, based on data from World Bank, IMF, Oxford Economics, Bank of Korea, Korea Customs Service, Central Bank of the Russian Federation, Department of Statistics Malaysia, CEIC, Central Bank of Hungary, and The Country Chronologies and Background Material to Exchange Rate Arrangements into the 21st Century: Will the Anchor Currency Hold? (Ilzetzki, Reinhart, and Rogoff, 2011).


Bond market 10-year return outlook: Setting reasonable expectations

Barclays Canadian Agg

Global Agg Ex Canada in CAD - Hedged

Canada Credit Index

Canada Government Bond Index

Canada Cash

Canada Inflation

0% 1% 2% 3% 4% 5% 6%

95th

75th

Median

25th

5th

Percentiles key:

Volatility (median annual standard deviation of returns)

IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modelled asset class in CAD. Simulations are as of September 30, 2015. Results from the model may vary with each use and over time. Notes: Forecast corresponds to distribution of 10,000 VCMM simulations for ten-year annualized nominal returns as of September 2015 in CAD for asset classes highlighted here. Volatility is the median volatility of 10,000 VCMM simulations. Source: Vanguard.


Setting reasonable expectations, being aware of widely dispersed potential returns

10-year annualized return outlook

Canada Equity

Unhedged Global Equity Ex Canada

Commodities in CAD (Unhedged)

-10% -5% 0% 5% 10% 15% 20% 25%

95th

75th

Median

25th

5th

Percentiles key:

IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modelled asset class in CAD. Simulations are as of September 30, 2015. Results from the model may vary with each use and over time. Notes: Forecast corresponds to distribution of 10,000 VCMM simulations for ten-year annualized nominal returns as of September 2015 in CAD for asset classes highlighted here. Volatility is the median volatility of 10,000 VCMM simulations. Source: Vanguard.


20%/80% 60%/40% 80%/20%

History 1971-2015History 2000-2015

Projected 10-year real return outlook for balanced portfolios

History Forecast

10-y

ear a

nnua

lized

retu

rns

-5%

0%

5%

10%

15%

1980 1985 1990 1995 2000 2005 2010

20/80: 10 year Annualized Real Return60/40: 10 year Annualized Real Return80/20: 10 year Real Annualized Real Return

IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modelled asset class. Simulations are as of September 30, 2015. Results from the model may vary with each use and over time. Note: Forecast displays 5th/25th/75th/95th percentile ranges of 10,000 VCMM simulations for projected real returns for balanced portfolios in CAD. The equity portfolio is 25% Canadian equity and 75% global ex-Canada equity. The bond portfolio is 25% Canadian bonds and 75% global ex-Canada bonds. Source: Vanguard.


Effects of stronger U.S. dollar are not one-sided

Impact on employment growth Impact on real GDP growth and components

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Service-sectoremployment

Manufacturing-sectoremployment

Annu

al g

row

th (p

erce

ntag

e po

ints

)

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

Private domestic demandgrowth

Trade balanceSe

ason

ally

adj

uste

d an

nual

rate

gro

wth

(p

erce

ntag

e po

ints

)

Notes: Estimated impacts based on regressions of macro variables (components of employment growth and real GDP growth) on Real Broad Dollar Index. Estimated effects arise from applying cumulative real appreciation since third-quarter 2014 (12%) to corresponding regression coefficients. Results are weighted by components as follows: service-providing employment (84%), goods-producing employment (16%), consumer services (46% of GDP), durable goods (7%), nondurable goods (15%), imports (15%), and exports (13%). U.S. government sector not included in this analysis. Sources: Vanguard calculations, based on data from Moody’s Analytics Data Buffet.

Fixed investment Services Nondurable goods Durable goods

Imports Exports


Important information

Date of publication: January 19, 2016. The views expressed in this presentation are those of the individual representative, are subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc. The individual representative may not necessarily update or supplement their views and opinions whether as a result of new information, changing circumstances, future events or otherwise. Certain statements in this material may be considered “forward-looking information” which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein. This presentation is for informational purposes only. The material in this presentation is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice. While this information has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material. Any information regarding third-party fund managers is solely for educational purposes. This presentation does not constitute an offer or solicitation and may not be treated as an offer or solicitation 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. In this presentation, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc. No part of this presentation may be reproduced, distributed, disseminated or referred to, in whole or in part, in any form, including to any investor, without prior written and express permission by Vanguard Investments Canada Inc. By participating in this presentation or by accepting any copy of the slides presented, you agree to be bound by these terms and conditions.


Important information (continued)

The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modelled asset class. Simulations as of September 30, 2015. VCMM results will vary with each use and over time. The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based. The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include Canadian, U.S. and international equity markets, several maturities of the government bond and corporate fixed income markets, U.S. and international fixed income markets, cash, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time. © 2016 Vanguard Investments Canada Inc. All rights reserved.

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