Investment outlook: What returns can you expect over the medium term?

AMP has analysed the return potential of 11 asset classes over the medium-term. Which one is projected to perform the best?

There’s no denying that COVID-19 has had a major effect on our economy resulting in Australia entering its first recession in nearly 30 years. Investment returns also suffered with the sharemarket plunging by about 35% earlier this year and property prices also taking a bit of a hit. But how are things looking for the future?

There was some good news last week with Reserve Bank deputy governor Dr Guy Debelle telling a Senate estimates hearing that it looked like the September quarter for the country probably recorded positive growth rather than slightly negative.

“The growth elsewhere in the country was more than the drag from Victoria and the drag from Victoria was possibly a little less than what we guessed back in August,” Dr Debelle said.

Many media outlets reported that this means Australia is technically out of recession but ABC News said those declaring the recession is over are jumping the gun. The Reserve Bank is releasing its next statement on monetary policy on Friday which may give us more insight into what the future holds for the economy.

Investment returns outlook

As for the outlook for investment returns Dr Shane Oliver, head of investment strategy and economics and chief economist at AMP Capital, said that it’s important that investors have realistic return expectations. “With low yields, low inflation and constrained growth it’s unreasonable to expect sustained double-digit or high single digit returns,” he stated.

AMP analysed the return potential of major asset classes and made projections on medium-term returns. Dr Oliver explained that AMP’s approach to get a handle on medium-term return potential of the various asset classes is to start with current yields for each and apply simple and consistent assumptions regarding capital growth.

The table below shows AMP’s return projections. “For Australia we have adopted a relatively conservative growth assumption reflecting slower productivity growth,” noted Dr Oliver.

Projected medium-term returns, pre fees and taxes

Asset class Current yield# 5-10 yr growth
potential (%pa)
5-10 year total
return potential (%pa)
World equities 2.1%^ 3.7% 5.8%
Asia ex Japan equities 0.9%^ 6.9% 7.8%
Emerging equities 1.3%^ 6.9% 8.3%
Australian equities 3.5% (4.5%*) 2.7% 6.2% (7.2%*)
Unlisted commercial property 5.0% 1.5% 6.5%
Australian REITs 4.2% 1.5% 5.7%
Global REITs 4.2%^ 1.5% 5.7%
Unlisted infrastructure 4.4%*^ 2.5% 6.9%
Australian bonds (fixed interest) 0.7% 0.0 0.7%
Global fixed interest^ 0.9% 0.0 0.9%
Australian cash 1.0% 0.0 1.0%
Diversified growth mix* 4.8%

Source: AMP Capital. Assumes inflation averages around 1.5%pa. #Current dividend yield for shares, distribution/net rental yields for property and duration matched bond yield for bonds. ^Includes forward points. *With franking credits added in.

It looks like emerging markets have the highest return potential over the next five to 10 years, followed by Asian equities (excluding Japan) and Australian equities (if you add in franking credits).

Dr Oliver pointed out that the medium-term return potential for a diversified growth mix of assets has fallen from 10.3%pa in March 2009 and 5.6% a year ago to just 4.8%.

“Commercial property and infrastructure come out relatively well, but face greater than normal uncertainty in the demand for retail and office space and human transport infrastructure,” added Dr Oliver.

Tips for investors

So what does this all mean for investors? Dr Oliver shared the following pointers:

  • Have reasonable return expectations.
  • Remember that allocating more to growth assets to boost overall returns does mean taking on more risk.
  • Bear markets are painful and are hard to predict, but they do push up the medium-term return potential of shares and so provide opportunities for investors.
  • Some of the decline in return potential reflects very low inflation – real returns haven’t fallen as much – and 4.8%pa is still well above sub 1% bank term deposit rates.
  • Focus on assets with decent sustainable income flow as they provide confidence regarding future returns.

Cover image source: William Potter (Shutterstock)

This article was reviewed by Editor-at-Large Effie Zahos before it was published as part of our fact-checking process.


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