Global tariff1 discussions have been a major factor in shaping the economic outlook, but what other themes could impact investors in the coming years?

In the video below, Kevin Khang, senior international economist at Vanguard, explains that while tariffs will continue to affect economic growth and inflation2, there are two other significant trends to watch.

The first is government (or ‘fiscal’) deficits, which occur when a government spends more money than it receives in revenue in a given year. These deficits are growing at an unsustainable rate and could cause economic problems if not managed properly. The second trend is the increasing influence of artificial intelligence (AI). As AI becomes more integrated into different industries, it has the potential to boost economic performance, creating a tug of war between these two forces.

Kevin also explains that we are in a higher interest-rate environment than before the Covid-19 pandemic. This means that instead of expecting bonds3 to increase a lot in value, which they might do if interest rates were expected to keep going down, investors are more likely to earn their returns from the interest they receive and by reinvesting that interest at these higher rates.

Lastly, Kevin notes that US share (or ‘equity’) price valuations (how much investors are willing to pay for shares based on company earnings) have been stretched for several years. This is weighing on expected future returns because when prices are high it usually means lower returns going forward.

For US share prices to rise further, companies would need to keep growing their earnings significantly, or investors would need to be willing to pay more for those earnings. Both of these scenarios are unlikely.

In this environment, diversification is key. Spreading your money across different types of investments, industries and regions – rather than focusing only on US technology shares – can help to soften potential losses and manage risk.

1 Trade tariffs are taxes on imported goods.

2 Inflation is the rate of increase in prices for goods and services.

3 Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

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