Major Asset Classes Face Lowest Returns in 25 Years

Major Asset Classes Face Lowest Returns in 25 Years
Australia’s Top 3 Major Asset Classes are projected to achieve the lowest returns in a quarter of a century, according to the latest analysis by RiskWise Property Research.
CEO Doron Peleg said the RiskWise analysis clearly showed returns for the Top 3 major investment types, being shares, government bond yields and residential property, were projected to be at their lowest in 25 years.
“What we have found is that 2018 is projected to be by far the worse and poorest year for returns for investors across these asset classes,” Mr Peleg said. “This is unchartered territory.”
Shares were measured by ASX200, Government Bond yields were deemed to have a strong correlation with term deposits and risk-free assets, and residential property was split into houses and units. Residential property was based on an 80% loan-to-value ratio, meaning rental returns were used to cover interest repayments and other costs associated with the property. Only the capital growth was taken into consideration.
“Typically, in these asset classes investors can expect to see returns in the range of 5 per cent, at least,” he said.
“However, in 2018, under a realistic (and optimistic) scenario investors could achieve only 3.4 per cent growth for houses or ASX200 shares, with Bonds coming in at just below the 2 per cent mark.
“Previously the lowest was in 2015 with only 4.76 per cent and this was because we had a very low interest rate environment and volatility in the financial markets that led to negative returns of ASX200 shares. This meant that the only asset class that delivered solid returns, in the vicinity of 5 per cent, was houses at 4.76%.
“The next lowest before that at 4.93% was in 2011 when shares and residential property delivered negative growth due to higher interest rates having a negative impact on residential dwellings and volatility in the financial markets resulting in negative returns of 14.67% in the ASX index. This is when investors could have found a haven in government Bond yields and similar risk-free investments.”
Mr Peleg said the “extremely unusual” 2018 situation was due to a “perfect storm” of volatility and uncertainty in the financial markets, ultra-low interest rates combined with moderate projected growth in dwellings due to lending restrictions that had cooled the major markets, moderate or poor growth in the mining states, particularly Western Australia and to a certain extent Queensland, and uncertainty around the Banking Royal Commission that could further impact house prices.
“What you expect in an ultra-low interest rate environment is continued growth in dwelling prices, however, the lending restrictions have cooled the market and created an unusual situation of low house prices,” he said.
“This is the first time there has been a record low interest rate with only a limited number of investment opportunities, in general, in the housing market.”
He said until the GFC there had been a good correlation between high interest rate environments (high-growth environments) to strong returns from shares, however, due to “very strong volatility” in the financial markets and ASX200 there was no clear correlation between interest rates to changes in the ASX.
An example of this was in 2016 when there was a very low-growth environment and government Bonds delivered just under 2 per cent, yet the ASX delivered strong growth returns of 13.9 per cent.
Mr Peleg said as more volatility was expected in the financial markets for 2018-19, uncertainty around international major global events such as the US trade war with China, low interest rates and low growth, it was likely the trend of low returns would continue for the immediate future.
“Therefore, it seems investors looking for long-term returns to minimise the risks should take a risk-based approach to property,” he said.
“The 2018 property market greatly varied across the entire country and some areas do present investment opportunities and carry low risk.”