AMP Capital’s chief economist, Shane Oliver, has called on investors to have “realistic return expectations”, given the continuing slide in investment yields.
He also said investors should be aware that real returns won’t take as much of a hit, given that inflation is so low.
“While investment returns have been good, the medium-term (say five to 10-year) potential from major asset classes has been moving down,” Mr Oliver said.
“Investment returns have two components: yield (or income flow) and capital growth. Looking at both of these components points to lower average investment returns over the next five years compared to the last five years.”
Noting the high interest rates and rental yields of the 1980s, Mr Oliver said investments in that time provided high income and as such only modest capital growth was needed for growth assets to deliver strong returns.
“As it turns out, most assets had spectacular returns in the 1980s and 1990s and balanced growth superannuation fund returns averaged 14.1 per cent in nominal terms and 9.4 per cent in real terms between 1982 and 1999 (after taxes and fees),” he said.
However, returns have tracked downwards since then. Currently, a 1.5 per cent cash rate, 10-year bond yields of 2.5 per cent and gross residential property yields of 3 per cent point to lower return potential.
Coupled with slower growth in household debt, rising geopolitical tensions, ageing populations, technological innovation and the rapid growth in Asia’s middle class, capital growth potential from growth assets will likely be constrained. However, population growth will have the most significant effect.
AMP Capital predicts medium-term (five to 10-year) potential returns of 7.1 per cent for world equities, before fees and taxes. Australian equities are predicted to return 7.6 per cent and unlisted infrastructure will deliver 8.1 per cent.
“Low yields and constrained GDP growth indicate it’s not reasonable to expect sustained double-digit returns,” Mr Oliver said.
“In fact, the decline in the rolling 10-year average of super fund returns indicates we have been in a lower-return world for many years – it’s just that it only becomes clear every so often with bear markets with strong returns in between.”
“Much of this reflects very low inflation – real returns haven’t fallen as much,” he said, suggesting investors focus on assets with sustainable income flows.