In this article by Shane Oliver, he suggests that given the low interest rate environment, returns are likely to also be low over the medium term (5 to 10 years).  He provides some framework for estimating returns and suggests a projected 6.2% return per annum for a diversified growth mix of assets.  This has fallen from 10.3% per annum at the low point of the GFC in March 2009, and 5 years ago the return was nearly 8%.  The chart below shows the decline in yield (or income flow) on a number of asset classes, including residential property.

Source: Bloomberg, REIA, JLL, AMP CapitalSource: Bloomberg, REIA, JLL, AMP Capital
Source: Bloomberg, REIA, JLL, AMP Capital

Shane also points out that these low returns reflect very low inflation and real returns haven’t fallen as much (the difference between returns and inflation).  He suggests that focusing on assets with decent sustainable income flow help to provide confidence around future returns.  We would appear to have been in a lower return environment for some time now and this is to be expected with low yields and constrained GDP growth.

Several megatrends that are likely to impact medium term growth include:

  • Continued slower growth in household debt
  • Ongoing backlash against globalisation, deregulation and small government
  • Rising geopolitical tensions
  • Ageing populations
  • Constrained commodity prices
  • Technological innovation and automation
  • Growth of the middle class in Asia and China
  • Rising environmental awareness
  • The shift to sustainable energy.

You can download and print the full article here.

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About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

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Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.