Provision Newsletter

Planning can help you reach your savings goal sooner.

Do you want to save money for the future? Saving money is a process, and it helps to have a plan and budget to reach your financial goals. If you’re looking for ways to save money, these budgeting and money saving tips could help you reach your goals sooner.

How do Australians save?

Research by the Australian Securities and Investments Commission has found that almost three quarters of Australians save by putting spare money into a savings account, either by doing this themselves or by automatic transfer¹.

Some of the other popular ways to save money include keeping money in an account that can’t be touched (like a term deposit), building up extra savings in a transaction account or depositing savings into a home loan offset account².

What are you saving for?

The first step to save money is to figure out what your savings goal is. Recent research indicates that the most popular things Australians are saving for are a holiday, a rainy day and to buy or renovate a home².

You could be saving for one of these goals, or something else, like having a baby, funding your kids’ education, or for retirement. No matter what your goal is, it helps to have it in mind—then you can work out how much you’d like to save to reach this goal, and by when.

Once you have your goal, write it down, tell a friend, or both. Research suggests that writing your goals down, sharing them and tracking them means you’re more likely to achieve them³.

What are some common tips to save money?

Once you’ve decided what you’d like to save for, how much you need to reach your goal, and when you need to reach it by, the next step to consider is where your money will come from. One of the most common ways to save money is to create a surplus between how much you earn and how much you spend each month.

If you’re spending every cent that comes in, you may need to identify extra income sources to help you earn more money, or think about reducing your spending to free up money for your savings goals.

When it comes to how to budget and save, these budgeting tips could be helpful to you get started:

1. Create and track your budget

Creating a money smart budget is often seen as the best way to save money. By tracking your income and your spending, you can identify where your money goes, and from this you can look into avoiding some non-essentials or reducing some expenses.

For example, if you buy your lunch every day at work, you could bring your lunch instead. If you spend on non-essentials like pay TV, gym memberships, entertainment and eating out, you could either cut back completely, or find more affordable options.

In the end, every bit adds up. It’s your lifestyle so you don’t need to deprive yourself of every bit of fun, but even cutting back a little bit here and there on expenses could make a difference.

2. Review your bill providers

Unfortunately, bills are a part of life, but it’s possible you may not be getting the best deals out there, especially if it’s been a while since you last contacted your providers.  Reach out to your gas, electricity, mobile phone and broadband providers, and see if they have better deals that you can switch to help you save more money, or get more from your provider.

Another option to consider could be shopping around for a new provider, especially if your contract is due to expire. There are plenty of product and service comparison sites available online which can help you make an informed decision that suits your lifestyle and your budget.

3. Think green and cut wastage

Thinking green doesn’t just help the environment— it can also be one of your ways to save money. For example, if you find you’re throwing out food at the end of every week, you might be able to reduce your grocery spending and your food waste. Likewise, instead of replacing household goods, you could consider repairing, reusing, or upcycling them for another purpose.

If you are a two-car household, it may help to think about whether you can do without the second car. While this may mean you spend more on public transport and taxis, the upside is that there are environmental benefits, plus you could save money on petrol, tolls, parking, registration, insurance and maintenance.

4. Consolidate your debts

If you have a number of debts, consolidating them into one may save you money and make budgeting and money management easier. Having multiple debts, such as credit card debt, personal loans and a home loan could mean you’re paying more in interest rates and fees than you have to, because you’re paying to different providers.

There are plenty of debt consolidation loans out there, so if you are considering this option then it may be beneficial to either speak to a financial adviser or look on a comparison website for the best deal.

What’s the best way to save money you’ve earned?

Once you’ve identified what you’re saving for and where you’re going to get money to save, you’ll need to work out the best way to save money.

The way you save money could be different, depending on whether your saving goals are for the long term or short term. For example, a separate savings account where your money is readily accessible might be useful for a short-term goal. On the other hand, a term deposit, where your money is tied up for a set period of time in return for higher interest, could be a more suitable option for a longer-term goal.

When you’re looking for a suitable savings product, you’ll need to factor in many things, such as the fees charged, interest rates, how accessible your money is, whether you can set up an automatic direct debit and whether there’s a minimum amount you need to deposit each month.

If you’re looking for ways to save money, here are some of the most common options out there:

Save money in a savings account

Most banks in Australia offer a variety of options for transaction and savings accounts. Standard savings accounts usually offer low fees and access to your money, but you may get a lower interest rate. High interest savings accounts typically have higher interest rates, but there may be penalties for withdrawing your money before a set period of time has passed, or if you don’t meet ongoing minimum deposit requirements.

Save money in an offset account

An offset account can help you save money by minimising the interest you pay on your home loan. Offset accounts allow you to put extra money into your account to offset your home loan balance, so you can save money and you only pay interest on the remaining portion of your loan.

Save money using a term deposit

As well as transaction, offset, and savings accounts, many banks also offer a term deposit option. Term deposits work by locking your money away for a certain timeframe (or ‘term’) in exchange for a guaranteed interest rate return during that time. A general rule of thumb is the longer the timeframe, the higher the interest rate.

Term deposits are generally low in fees, typically require a minimum initial deposit, and can sometimes require a minimum ongoing deposit. If you withdraw money from your term deposit account before the timeframe is over, you could pay additional fees.

Save money through investment bonds in Australia

Investment bonds are a tax-effective way of saving for the long term (longer than 10 years). Australian bonds typically require either a minimum deposit or minimum ongoing deposits, and you can choose how your money is invested.

Other options to save money

If you’re looking to save and grow your savings over the longer term, you could also consider putting your money into an investment. Some of the best ways to invest money in Australia include shares, property, exchange traded funds, and additional super contributions; however, this will depend on your lifestyle, the amount you have to save, and your risk tolerance.

Before investing your savings, it might be useful to speak to a financial adviser to help you make the right choice for your goals. Please contact us on |PHONE| if you seek further assistance on this topic .

Source : AMP October 2019 

1 ASIC Moneysmart, How Australians save money.
2 ASIC Moneysmart, How Australians save money.
3 Dominican University, Goals Research, pg 3

Important:
This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling |PHONE|, before deciding what’s right for you.

All information in this article is subject to change without notice. Although the information is from sources considered reliable, AMP and our company do not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP and our company do not accept any liability for any resulting loss or damage of the reader or any other person.

Growth isn’t always good

A lot of small business advice assumes that you intend to grow. You may be advised to hire more staff, open more stores and do more marketing to win customers.

But what if you’re happy with your current business size? Perhaps you:

• launched your business for lifestyle reasons and don’t want to take on more work

• feel you’re already at optimal business size

• have other commitments that prevent you investing more time in your business

• don’t want the stress of expanding your business

• feel it’s less risky to stay small

It’s entirely possible to maintain a smaller business size while making a healthy profit.

Advantages of a lifestyle business

Choosing stability over never-ending growth can lead to big benefits for you and your business.

• You don’t have to reinvest so much money
  Growth requires investment, but sometimes revenue doesn’t grow fast enough to repay it. The resulting cash flow crunch can be stressful. Non-growth businesses don’t have to worry so much about this.

• Financial predictions will be simpler
  Revenue and expenses are simpler to forecast with a smaller lifestyle business. There are fewer building projects, equipment upgrades and new hires to budget for. That stability can make it easier to balance your bottom line, so you spend less time worrying about your financials.

• You’ll feel less stressed
  It can be hard to relax when you keep pushing, growing and raising expectations. Ongoing expansion generally requires a lot of bandwidth. That might be good for your bank balance – but not for your blood pressure. Less aggressive targets can reduce stress and leave you more time to enjoy life.

• The quality of your work may be higher
  Even with the best of intentions, business owners who are focused on growth and money can be distracted from the quality of their work. With a lifestyle business, you can focus on doing high quality work all the time.

• You can build goodwill
  Non-growth businesses often spend more of their energy on non-financial goals like delighting customers and being best-in-class. The extra focus on serving the market can create goodwill and encourage greater customer loyalty.

• You can adapt quickly to market conditions
  To chase growth, businesses often have to lock themselves into long-term strategies. But what if the market conditions change? When business size isn’t so important to you, you can stay nimble. With no fixed growth strategy, it can be easier to change direction.

You can take it slow, but don’t stand still

It’s been said that businesses are like sharks – if they don’t keep moving forward, they die. There’s some truth in this because of the twin forces of depreciation and inflation:

• Depreciation eats into the value of the assets your business owns.

• Inflation reduces the value of the money you earn (and causes suppliers to hike prices).

Chances are, your competitors are also working hard to take market share off you. With all this going on, you can’t afford to stand still. At zero growth, you’d actually drift backwards. But you can maintain a viable business size with just a few percent annual growth.

 Please contact us on |PHONE|.

Source : Xero 

Reproduced with the permission of Xero.

Xero is software designed to make life better for small businesses and their advisors. Its online accounting platform provides the foundation on which businesses can build a complete business solution. It connects businesses with their bank, accounting tools, their accountant, payment services and third-party apps, so everything is securely available at any time, on any device.

Important:
This provides general information and hasn’t taken your circumstances into account.  It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.75 per cent.

While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.

Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation. Long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.

The Australian economy expanded by 1.4 per cent over the year to the June quarter, which was a weaker-than-expected outcome. A gentle turning point, however, appears to have been reached with economic growth a little higher over the first half of this year than over the second half of 2018. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector should all support growth. The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.

Employment has continued to grow strongly and labour force participation is at a record high. The unemployment rate has, however, remained steady at around 5¼ per cent over recent months. Forward-looking indicators of labour demand indicate that employment growth is likely to slow from its recent fast rate. Wages growth remains subdued and there is little upward pressure at present, with increased labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity has weakened and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

The Board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target. The economy still has spare capacity and lower interest rates will help make inroads into that. The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.

It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

Source: Reserve Bank of Australia, October 1st, 2019

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

Can you recite the last line of Gone with the Wind? If not, you’ll find the answer at the end of this article.

If you scrolled down straight away, you might be too keen for your own good. We’ve all heard that patience is a virtue, and it can even save you money.

For people figuring out how to fund the lifestyle they’d like in retirement, now’s a good time to remember the benefits of delayed gratification.

That’s because instant gratification is the enemy of hitting your long-term goals, the things you’ve worked so hard to achieve. You might find that passing up something less important now will give you something more important when you retire.

Instead of deciding which new European car will make you the envy of your neighbours, you might imagine your grandkids running around with their own replica vehicles – or even a pony.

Why we want it now

It’s only human to want things straight away. Evolution has given us a desire for immediate rewards. We’ll eat the food in front of us if we’re not sure where the next meal’s coming from. Most other animals simply act on these impulses, they don’t know any other way. But we can imagine the future.

When it comes to finance, people don’t always make rational decisions, which is why some areas like house purchases usually have cooling-off periods. As you get closer to retirement, it’s good to think closely to make every buying decision count.

You have the power

Even if you think you’ve never been good at resisting temptation, it’s likely you’ve already practised some form of delayed gratification.

If you have kids, you’ll already know the challenges of unfiltered demands. Most parents teach the benefits of waiting and sacrificing something now for something more rewarding later.

None of us knows exactly how long we’ll be retired. Here are some ways you can resist the temptation to spend too much before your income changes.

Picture this

If you find it hard to respond to the urge to buy right now, it might be easier if you visualise what you want. Whether it’s that trip to Broome you’ve promised yourself or outings with your grandkids, pick one of your big goals and stick a picture of it under your fridge magnet.

A picture of a camel train on Cable Beach will look nicer than that unpaid invoice for that impulse extra bookshelf you didn’t really need.

Tell your friends

Your partner, family and friends can all help you get there. If you’re planning to renovate or downsize when you give up work, you might get some great tips for reliable tradies from those who have been there and done it.

Tell your family and friends your plans and see how your objective becomes theirs, bringing you useful advice and encouragement. You might also consider finding a financial adviser if you haven’t already done so. You don’t have to reach your goals all on your own. Even the solo round-the-world sailor has a support team. 

You might find it useful to talk to someone who is already retired about what they’d have done differently. Many people wish they’d put more aside to live more comfortably.

Shop around

There’s never been more choice than these days of online shopping. Although this means more temptation. it’s also never been easier to price check whatever you have your eye on. So, keep an eye on price comparison sites and discount codes to find the deal that’s right for something you really need now.

As advertisers get more and more personal data, they’re better at targeting what we want, and using techniques to persuade us to buy right now. Saving 10% off in the end-of-financial year sale still leaves 90% to pay, which might be worth several months of household bills down the line. Think of your other goals so you use the value scale that’s right for you.

What a difference a day makes

Taking time to reflect often changes the choices you make. Wait 24 hours and you might find you can do without that extra pair of shoes, when next day you come across three pairs you’ve hardly worn.

Many consumer goods are marketed to persuade you that you need something right now. Think of those shopping channel ads where they’ll throw in an extra mophead if you buy that new cleaner within the next 10 minutes. Make sure you really care about that mophead before you commit.

You can still pop the bubbly

Decide what you will keep doing. You might be able to do without your gym membership or trip to the symphony, but if you really love it, then it might be a false economy. Reaching your goals means you can still stay happy and healthy.

If you hit your plan you can reward yourself along the way. If you’ve cut out takeout coffee, then once a quarter you might have high tea at a smart hotel within your means. You’ll look forward to it more and celebrate reaching another milestone along the way.

And the last line of Gone with the wind?

Scarlett O’Hara says, “Tomorrow is another day.”

Please contact us on |PHONE| if you seek further discussion on this topic.

Source: AMP October 2019 

Important:
This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling |PHONE|, before deciding what’s right for you.

All information in this article is subject to change without notice. Although the information is from sources considered reliable, AMP and our company do not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP and our company do not accept any liability for any resulting loss or damage of the reader or any other person.

The claim that Australia has gone 28 years without a recession since the early 1990s recession ended in 1991 has been subject to some criticism in recent times with the economy sliding into a “per capita recession” where economic growth has been below population growth. Some have latched on to a recent Federal Reserve Bank of St Louis analysis that noted the 28 year claim should be “taken with a grain of salt” because “Australia has had three recessions since 1991 when looking at GDP per capita, the most recent one being from the second quarter of 2018 to the first quarter of 2019.”

GDP per capita

It’s true that Australia’s relatively strong population growth helps grow the economy. And in terms of living standards it’s GDP per person or per capita that really matters and the recent slowdown in GDP growth to 1.4% year on year which is below 1.6% population growth is a big concern. I even wrote a note after the release of the December quarter GDP data entitled “Australia enters a per capita recession” (which can be found here). But it does not measure up as a conventional recession.

Recession definitions

The conventional definition of recession is two or more consecutive quarters of falling real GDP. 

Source: ABS, AMP Capital

On this basis Australia’s last recession ended back in 1991, ie 28 years ago.

However, if GDP per capita is looked at then Australia has had three per capita recessions since 1991 using the two or more consecutive quarters of decline approach – in the September and December quarters of 2000, the March and June quarters of 2006 and the September and December quarters of 2018. There was also a per capita recession in 1985-86.

Source: ABS, AMP Capital

However, while it may be reasonable to call them “per capita recessions” they don’t compare at all to the scale of the conventional recessions in 1981-83 and 1990-91 that saw far deeper and longer falls in GDP and per capita GDP.

* Because there were two periods of consecutive quarterly declines in per capita GDP in each of the 1981-83 and 1990-1991 periods broken by one quarterly rise the Fed Reserve Bank of St Louis note ascribes two per capita recessions in each period although for all intents and purposes they were really each just one big recession. Source: ABS

Wider definitions of recession

Nor would the per capita recessions of 1985-86, 2000, 2006 and 2018 comply with wider definitions of recession such as that of the US National Bureau of Economic Research that defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

For example, the next chart shows employment growth and unemployment since 1980 with per capita recessions shaded.  

Source: ABS, AMP Capital

Only the per capita recessions of 1981-83 and 1990-91 which were also conventional recessions saw a significant slump in employment (both of around 4%) and sharp rises in unemployment (with both seeing around a 5 percentage point rise). The other per capita recessions saw very little or no fall in employment and only small or no rises in unemployment. In fact, through the last per capita recession of 2006 jobs growth remained solid and unemployment fell, which makes a non-sense of calling it a recession particularly given it was in the midst of the mining boom! The recessions of the early 1980s and 1990s were horrendous events in terms of mass job losses, corporate collapses and financial failures. The per capita recessions of 2000, 2006 and more recently do not compare.

Which brings us to the smell test. For Australians like myself who lived through the early 1980s and early 1990s recessions it’s doubtful that they would recall the per capita recessions of 1985-86, 2000 or 2006 as real recessions. Which is why they are often just referred to as slowdowns. The 2000 slowdown occurred because of the pull forward of spending due to the start up of the GST and also the end of the Olympics and the 2006 per capita recession can hardly be seen as a recession given it was in one of the biggest booms in Australian history, ie the mining boom. And a common question in relation to the recent episode is “things aren’t that bad, so why is the RBA cutting?” (The answer being that waiting for a real recession is likely leaving it too late.)

Consistent with this, consumer and business confidence was bouncing around average levels in 2000, 2006 and more recently in contrast to the slump of the early 1990s.

Source: NAB, Westpac/MI, AMP Capital

It’s not just strong population growth

While strong population growth helps grow the Australian economy as the Fed Reserve Bank of St Louis notes, it didn’t stop real recessions in 1981-83 and 1990-91. Going into the early 1980s recession population growth was 1.8% year on year and going into the early 1990s recession it was 1.5% year on year. So, if strong population growth didn’t stop conventional recessions in the past, other factors must have been playing a roll in heading off conventional recessions over the last 28 years. These include:

• economic reforms of the 1980s and 1990s that made the economy more flexible;

• the floating of the $A that has seen it fall whenever there is a major economic problem providing a shock absorber for the economy;

• desynchronised cycles across industry sectors and states;

• strong growth in China that helped export demand through the GFC;

• counter cyclical economic policy – like stimulus payments and monetary easing that helped in the GFC; and

• good luck – which can never be ignored lest hubris set in!

But what about through the GFC?

To be sure, Australian confidence had a recession-like fall through the global financial crisis (GFC) reflecting the dyer global news at the time and annual growth in GDP per capita fell, but there was only one quarter of contraction in both GDP and GDP per capita and there was no recession like slump in employment or rise in unemployment. What’s more the fall in per capita GDP at the time of the GFC was trivial compared to that in the US, Europe and Japan suggesting again that other things must have helped Australia beyond strong population growth.

Source: ABS, Bloomberg, AMP Capital

Concluding comment

The slowdown in Australian growth to below the level of population growth at a time of weak wages growth and high underemployment is a real concern and highlights the need to boost growth and productivity. However, a per capita recession on its own is not the same as a real recession, and the three seen over the last 28 years do not compare to the recessions of the early 1980s and early 1990s in terms of their impact on jobs, economic welfare and confidence. Which is why they are normally just referred to as growth slowdowns as opposed to being recessions. To be sure the risk of conventional recession in Australia has increased – although for the reasons noted here I think it remains unlikely. But there is clearly more to Australia’s 28 years without a conventional recession than just strong population growth.

Source: AMP Capital 30 September 2019

Important notes: 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)  (AMP Capital) 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 and must not be provided to any other person or entity without the express written consent of AMP Capital.

The past 10 years have seen pretty good returns for well-diversified investors. The median balanced growth superannuation fund returned 7.3% pa over the five years to July and 8.2% pa over 10 years and that’s after fees and taxes. This is impressive given that inflation has been around 2%. 

Source: Mercer Investment Consulting, Morningstar, AMP Capital

Shares and growth assets have literally climbed a wall of worry this decade with a revolving door list of worries around public debt, the Eurozone, deflation, inflation, rate hikes, Trump, North Korea, China, trade wars, growth, house prices, etc. But returns benefitted from the recovery after the GFC and a search for yield as interest rates have collapsed depressing yields on most assets. But – while it sounds like a broken record – the decline in yields points to eventually more constrained returns ahead.

Declining yields = falling medium-term return potential

Investment returns have two components: yield (or income flow) and capital growth. Looking at both of these components points to lower average investment returns over the next five years compared to the last five years. It’s basic to investing that the price of an asset moves inversely to its yield all other things being equal. Suppose an asset pays $10 a year in income and suppose its price is $100, which means an income flow or yield of 10%. If interest rates are cut resulting in increased demand for the asset, as investors search for a higher yield, such that its price rises to $120 given the $10 annual income flow its yield will have fallen to 8.3% (ie $10 divided by $120) as its price has gone up by 20%. So, yield moves inversely to price. But as yields decline it means a lower return potential going forward.

Since the early 1980s investment yields have collapsed. Back then the RBA’s “cash rate” was around 14%, 1-year bank term deposit rates were nearly 14%, 10-year bond yields were around 13.5%, commercial and residential property yields were around 8-9% and dividend yields on shares were around 6.5% in Australia and 5% globally. This meant that investments were already providing very high income so only modest capital growth was needed for growth assets to generate good returns. So, most assets had very strong returns and balanced growth super fund returns averaged 14.1% in nominal terms and 9.4% in real terms between 1982 and 1999 (after taxes and fees).

Over the last four decades, investment yields have mostly fallen quite sharply. See the next chart.

Source: Bloomberg, REIA, JLL, AMP Capital

Today the cash rate is 1%, 1-year bank term deposit rates are 1.5%, 10-year bond yields are 0.9%, gross residential property yields are around 3%, commercial property yields are just below 5%, dividend yields are still around 5.5% for Australian shares (with franking credits) but they are 2.5% for global shares. This points to a lower return potential for a diversified mix of assets.

What’s more, the capital growth potential from growth assets is likely to be constrained relative to the past reflecting more constrained nominal economic growth. Several megatrends are likely to impact growth over the medium term. These include:

• Continued slower growth in household debt. 

• An ongoing retreat from globalisation, deregulation and small government in favour of populist, less market friendly policies.

• A shift in corporate focus from profit to “balanced scorecards”.

• Rising geopolitical tensions – notably as the US attempts to constrain the rising power of China as evident in the trade war.

• Aging and slowing populations – resulting in slowing labour force growth and rising pressure on public sector budgets.

• Technological innovation and automation.

• Continuing rapid growth in Asia and China’s middle class. 

• Pressure to slow emissions & the impact of global warning.

• A large shift to sustainable energy as its cost continues to fall.

Most of these will constrain economic growth & hence returns.

Medium-term return projections

Our approach to get a handle on medium-term return potential is to start with current yields for each asset class and apply simple and consistent assumptions regarding capital growth reflecting the above-mentioned megatrends. We also prefer to avoid forecasting and like to keep the analysis simple.

• For bonds, the best predictor of future medium-term returns is current bond yields as can be seen historically in the next chart. If a 10-year bond yield is held to maturity its initial yield (0.93% right now in Australia) will be its return over 10 years (ie 0.93%). We use 5-year bond yields as they more closely match the maturity of bond indexes.

Source: Global Financial Data, Bloomberg, AMP Capital

• For equities, current dividend yields plus trend nominal GDP growth (a proxy for capital growth) does a good job of predicting medium-term returns.¹

• For property, we use current rental yields and likely trend inflation as a proxy for rental and capital growth.

• For unlisted infrastructure, we use current average yields and capital growth just ahead of inflation.

• In the case of cash, the current rate is of no value in assessing its medium-term return. So we allow for some rise in cash rates over time.

Our latest return projections are shown in the next table.

Projected medium term returns, %pa, pre-fees and taxes

# 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. Source: AMP Capital.

The second column shows each asset’s current income yield, the third shows their 5-10 year growth potential, and the final column their total return potential. Note that:

• We assume inflation averages around or just below central bank targets.

• For Australia we have adopted a relatively conservative growth assumption reflecting slower productivity growth.

• We allow for forward points in the return projections for global assets based around current market pricing.

Key observations

Several things are worth noting from these projections.

• The medium-term return potential has continued to fall due largely to the rally in most assets and fall in investment yields. Projected returns using this approach for a diversified growth mix of assets have fallen from 10.3% pa at the low point of the GFC in March 2009, to 8.6% five years ago, to 6.2% a year ago and to now just 5.6%.

Source: AMP Capital

• Government bonds offer low returns due to ultra-low yields. Yes, bond returns have been strong lately as yields have collapsed pushing up bond prices. But this is no guide to future returns, particularly if bond yields stop falling.

• Unlisted commercial property and infrastructure continue to come out relatively well, reflecting their higher yields.

• Australian shares stack up well on the basis of yield, but it’s still hard to beat Asian/emerging shares for growth potential.

• The downside risks to our medium-term return projections are that: the world plunges into a recession driving another major bear market in shares or that investment yields are pushed up to more normal levels as inflation rebounds causing large capital losses. Just allow that drawdowns in returns tend to be infrequent but concentrated and it’s been a while since the last big one. See the first chart. 

• The upside risks are (always) less obvious but could occur if we see improving global growth but inflation remaining low.

Implications for investors

• First, have reasonable return expectations. Low yields & constrained GDP growth indicate it’s not reasonable to expect sustained double-digit or even high single digit returns. In fact, the trend decline in the rolling 10-year average of both nominal and real super fund returns since the 1990s 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 and then strong returns in between.

• Second, remember that responding to a lower return potential from major asset classes by allocating more to growth assets does mean taking on more risk.

• Third, bear markets are painful, but they do push up the medium-term return potential of investment markets to higher levels and so provide opportunities for investors.

• Fourth, some of the decline in return potential 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.

Source: AMP Capital 25 September 2019

¹Adjustments can be made for: dividend payout ratios (but history shows retained earnings often don’t lead to higher returns so the dividend yield is the best guide); the potential for PEs to move to some equilibrium level (but forecasting the equilibrium PE can be difficult and dividend yields send valuation signals anyway); and adjusting the capital growth assumption for some assessment regarding profit margins (but this is hard to get right). So, we avoid forecasting these things.

Important notes: 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) (AMP Capital) 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 and must not be provided to any other person or entity without the express written consent of AMP Capital.