Returns over next 5 years ‘are likely to slow’: Shane Oliver

“Back in the early 1980s the medium-term return potential from investing was pretty solid for the simple reason that interest rates … and rental yields were so high,” Mr Oliver said.

“The RBA’s ‘cash rate’ was around 14 per cent [and] …such yields meant that investments were already providing very high income and only modest capital growth was necessary for growth assets to generate good 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).”

Since then however, Mr Oliver said yields have fallen for the most part, which has continued over the last five years.

“Today the cash rate is 1.5 per cent, [three]-year bank term deposit rates are 2.5 per cent … [and] gross residential property yields are around 3 per cent. This on its own points to a lower return potential,” he said.

Further, before fees and taxes, Mr Oliver projected real estate investment trusts will have a medium return of 6.7 per annum, using current rental yields and likely trend inflation to calculate rental and capital growth.

He added that the capital growth potential from assets is likely to be reflective of the last five year’s constrained slight economic growth.

The trends Mr Oliver sees impacting growth in the medium term include the consistent slowdown in household debt growth, the backlash of globalisation, deregulation and small government resulting in populist policies that are less market friendly like rising regulation, the rising geopolitical tensions between the US and China, the aging population diminishing the workforce, the growth of Asia and China’s middle class and the shift to sustainable energy.

The projection, however, does not account for the potential of recessions or the loss of capital through inflation rebounds pushing yields to more normal levels or for the possibility overall global wealth improving but inflation is kept low.

With all of this in mind, Mr Oliver said investors need to keep their return expectations in check.

“Low yields and constrained GDP growth indicate it’s not reasonable to expect sustained double-digit returns. 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.”

“Second, much of this reflects very low inflation – real returns haven’t fallen as much.

“Finally, focus on assets with decent sustainable income flow as they provide confidence regarding future returns.”