Return outlook looks robust

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Professional investors expect Australian and global equity market to return around 8 per cent a year over the next few years, but with higher volatility.

Investment management researcher Morningstar asked a group of 60 multi-asset fund managers to provide their expectations for returns from a number of asset classes, over both short and long terms (up to five years).

While expectations for Australian and global equity growth are similar, at around 8 per cent, managers expect lower levels of volatility from the domestic equity market.

Most managers anticipate a medium-term cash rate of between 2 per cent and 3 per cent, which suggests slow and moderate growth in interest rates.

They expect a fixed income return that is not far off current the 10-year government bond rate (around 2.7 per cent). Managers are expecting the low-yield environment to continue for some time.

Managers expect a 4 per cent return from investment grade credit.

They believe that emerging markets returns will be in line with or marginally lower than Australian and global equities but with higher volatility. This implies that managers do not believe there is adequate compensation to warrant an investment in emerging market securities.

Morningstar says: “Two themes emerge from the survey data. The first is that return expectations remain robust.”

“This is surprising. We continually hear managers talk down the future returns of many asset classes, given the unprecedented global monetary stimulus that has supported investors’ risk appetite after the financial crisis.”

The second theme is that volatility is expected to be higher than reported volatility over the past five years.

The average volatility expectation for Australian and global equities is around 17 per cent, compared with reported volatility of 11 per cent to 12 per cent over the past five years.

Managers expect emerging markets volatility to be 22 per cent but actual volatility was only 10 per cent.

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