Super fund returns could fall to around 5.5 per cent per annum (p.a.) over the medium term, according to AMP chief economist Shane Oliver, amid higher inflation and lower growth.
This represents a substantial fall from the 14.1 per cent p.a. nominal return (or 9.4 per cent p.a. in real terms after inflation) seen for balanced growth super funds from 1982 to 1999.
Dr Oliver noted that super returns have been more constrained since the turn of the century, with a nominal return of 6.2 per cent p.a. or 3.6 per cent p.a. in real terms since 2000.
“The odds are that returns are likely to be even more constrained over the next 5 to 10 years,” he predicted.
The fundamental drivers of the returns observed in the 1980s are now reversing, Dr Oliver said, as five “megatrends” are set to put a damper on returns in the medium term.
Among these so-called megatrends is a backlash against economic rationalist policies and increased support for big government.
“It’s evident in Australia, with the rising share of government spending, widespread support for higher taxes and labour market re-regulation. The risk is lower productivity and higher inflationary pressure,” said Dr Oliver.
The reversal of globalisation was identified as another constraining factor following a stall in progress towards freer trade and a rise in trade barriers in recent years.
“The pandemic, rising geopolitical tensions, and rising nationalism are accelerating this,” Dr Oliver said.
“Support for free trade policies has faded in favour of friendshoring, onshoring, and old-fashioned protectionism to support manufacturing locally, e.g. with subsidies for battery projects and electric vehicles. Inevitably, this will lead to higher costs.”
The megatrend of increasing geopolitical tensions will also weigh on the outlook for returns, according to Dr Oliver, who suggested the emergence of a “new Cold War”.
“We are now in a ‘multipolar’ less stable world with arguably a new Cold War between China, Russia, and Iran on the one hand and Western countries on the other,” he stated.
“The war in Ukraine and now Israel are arguably signs of this. This adds to the threat to free trade but also risks increased military spending. This means more demand for metals and more government spending which will add to inflationary pressure.”
Furthermore, climate change and decarbonisation were highlighted as another megatrend.
While acknowledging that the shift to sustainable energy may eventually result in lower costs, Dr Oliver noted that climate change and the transition to net zero will increase costs and result in higher inflation in the meantime.
Finally, a decrease in workers and increase in consumers was identified as another megatrend that will add to inflationary pressures due to lower supply and higher demand.
“Taken together, these key megatrends risk lowering productivity growth making economies more inflation-prone,” Dr Oliver said.
“There is some offset with technological innovation – with artificial intelligence offering significant potential to boost services sector productivity, although this will take time to materialise.
“But the more inflation-prone environment means central banks will have to work harder to keep inflation down, which will require higher and more variable interest rates than we saw pre-pandemic.”
AMP has projected a nominal medium-term return of 5.5 per cent p.a. for balanced growth super funds after taxes and fees based on a traditional mix of assets.
“This is still better than bank term deposit rates which average up to 4.5 per cent before taxes and makes no allowance for any value added from active investment management,” Dr Oliver noted.
“The main downside risk is that inflation trends higher, driving a further trend rise in interest rates, bond yields and yields on shares, property and infrastructure, resulting in an ongoing drag on capital growth.”
In conclusion, Dr Oliver said that super fund members should have reasonable return expectations, given that the favourable conditions seen in the past have now faded.
