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Why super returns may be heading lower

From the early 1980s investment returns were spectacularly strong. Despite some bumps, like the 1987 crash, this was reflected in Australian balanced growth superannuation funds returning an average 14.1% pa in nominal terms and 9.4% pa after inflation between 1982 and 1999. And that was after taxes and fees.


Source: Mercer Investment Consulting, Morningstar, Chant West, AMP

Since 2000 nominal super returns have been more constrained averaging 6.5% pa with real returns averaging 3.8% pa. This is still pretty good. Returns are likely to be similarly constrained over the next 5-10 years.

Why were returns from the early 1980s so strong?

There was an element of mean reversion (or payback) after the poor returns of the high inflation 1970s which left shares on low price to earnings ratios and bond yields very high. But fundamental drivers were:

  • Supply side, economic rationalist policies - deregulation, privatisation, competition reforms, tax reform and free trade.
  • Globalisation which boosted trade and competition and lowered costs.
  • Easing geopolitical tensions with the ending of the Cold War in 1989.
  • A corporate focus on return on capital.
  • Positive demographics as baby boomers entered peak consumption and peak productivity.
  • Inflation targeting by independent central banks with a focus on keeping inflation and inflation expectations at low levels.
  • And, of course, the tech boom of the 1990s.

This drove strong productivity growth and low inflation which underpinned a secular bull market in shares through the 1980s and 1990s. It paused in the US in 2000-2013 but took off in Australia with the 2000s resources boom only to take off in the US again from 2013. Despite a brief inflation scare in 2022 its continued helped by AI optimism.


Since 1900 there have been four major secular bull markets in US shares: the 1920s (with electricity; chemicals and mass production); the 1950s and 60s (with petrochemicals, electronics and aviation); the 1980s and 90s (see the text); and since 2013. Source: Bloomberg, R Shiller, AMP

Mega trends – five key constraints on returns

Unfortunately, shares are no longer cheap, now trading on high PEs in the US and Australia, and the drivers of the strong returns from the early 1980s are reversing. On this front there are five key constraints.

1. Bigger government, less economic rationalist policies

Thanks to rising inequality, stagnant real wages, aging populations, climate change, the rise of populism partly fuelled by grievance driven social media and a collective memory loss regarding the lessons of the past there is a backlash against economic rationalist policies and more support for big government. It’s evident in the US with Trump’s tariffs and intervention in companies. It’s evident in Australia, with the rising public spending, support for higher taxes and labour market reregulation.

2. The reversal of globalisation

The post-WW2 surge in global trade saw production allocated globally according to comparative advantage. This helped cut inflation. But it stalled in the 2000s and trade barriers are rising. The pandemic, rising geopolitical tensions and nationalism are adding to this. Free trade is giving way to old-fashioned protectionism. This means higher costs.

3. Rising geopolitical tensions with a multipolar world

Declining military spending into the 2000s was disinflationary. This was facilitated by the move to a “unipolar” world dominated by the US and believe in free market liberalism. This started to fracture after the GFC, and we are now in a “multipolar” less stable world with arguably a new Cold War between China and its allies and Western countries. This is also driving increased military spending. This means more demand for metals and more government spending which will add to inflationary pressure.

4. Climate change and decarbonisation

Ultimately the shift to sustainable energy could result in lower costs. But we are a long way from that and climate change and the move to net zero will add to costs and inflation via: extreme weather events; associated rebuilding and higher insurance premiums; costs of mitigation; increased metals demand as economies retool; and increased pollution regulation.

5. More consumers but less workers

Global population growth is slowing, while in advanced countries and China the working age population is declining. And populations are aging, resulting in rising ratio of retirees to workers (i.e. a rising dependency ratio). Thanks to its high immigration program Australia is in a somewhat better position. But globally, the upshot is less workers (supply) and more consumers (demand) which will add to inflationary pressures.

Implications for growth and inflation

Taken together these key mega trends risk further lowering productivity growth making economies more inflation prone. 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. And the Australian Government following last month’s “Productivity summit” appears to recognise the need to reduce red tape. But the more inflation prone environment means central banks will have to work harder to keep inflation down, which will mean higher and possibly more variable interest rates than we saw pre-pandemic.

The collapse in inflation from the 1980s provided a tailwind for returns because the fall in interest rates and in related uncertainty allowed growth assets to trade on lower investment yields and higher price to earnings multiples (which boosted capital growth). A more inflation prone world will remove this tailwind with cash and fixed interest becoming relatively more attractive, price to earnings ratios on shares settling at lower levels and income yields on real assets at higher levels at some point (which will constrain capital growth). So far there is little sign of lower PEs although bond yields seem to be settling at higher levels.

What does all this mean for medium term returns?

Our approach to get a handle on medium term (i.e. 5-10 year) return potential of major asset classes is as follows:

  • For cash, we use our forecast cash rate over the medium term.
  • For bonds, the best predictor of future medium-term returns is current yields. The rise in yields has increased their return potential.
  • For equities, the current dividend yields plus trend nominal GDP growth provides a rough guide to future medium-term returns.


Source: Bloomberg, R Shiller, AMP

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

Our latest return projections are shown in the next table. The second column shows each asset’s current income yield, the third shows their 5–10-year growth potential, and the final column shows their total return potential. Note that: we assume inflation averages around 2.5% pa; and we have cautious real economic growth assumptions reflecting the five mega trends noted above.  This will likely constrain capital growth.

Key observations

  • After falling for many years (see next chart), the medium-term return potential using this approach improved after the 2022 inflation scare but the share market surge of the last few years has seen it fall back to around 6% pa for a balanced growth superannuation fund.
  • After allowing for taxes and fees this implies nominal medium-term returns around 4.9% pa, a bit below the average since 2000. This is still better than bank term deposit rates which average 3.6% pre-tax.


Source: AMP

  • The main medium term downside risk is that inflation rises again driving a rise in interest rates, bond yields and yields on shares, property and infrastructure resulting in a drag on capital growth.

Implications for investors

  • First, have reasonable return expectations. In the past super returns were boosted by very favourable conditions which have faded.
  • Second, remember there is no free lunch – investment opportunities offering higher returns likely entail much higher risk.
  • Third, medium term returns from super are still likely to be well above bank term deposit rates on an after tax and fees basis.
  • Finally, while bear markets when they occur are painful, they push up the medium-term return potential of shares and so can provide opportunities.

 

Dr Shane Oliver is Head of Investment Strategy and Chief Economist at AMP. 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.

 

17 Comments
Amayzingone
September 28, 2025

This report assumes a "classic" diversified balanced or growth portfolio.
It does not include the current high growth opportunities in Gold, Silver, Crytos, Technology and Ai.
So yes it appears to be correct for your average "set and forget" superannuation portfolio which most employees adopt.
But Not for the active fund manager (either personal or professional) seeking out new high growth opportunities in the markets which I have mentioned.

Wildcat
September 28, 2025

Shane, item 1 is bang on for all the western world including Australia. We have the non market portion of the economy (public employees) explode under Albo to 30% of the work force. It was 22% some 12-15 years ago.

This means for every working person they have to pay tax to pay the salary for someone who is net negative on productivity. This is because none of this increase is nurses, doctors, educators etc, they are all bureaucrats who make useless regulations that slows down the only part of the economy that is productive and makes them produce less which is a double negative whammy on the economy.

The ‘productivity’ talk feat held recently would’ve been hilarious, (as the reason productivity is so bad is the government is sucking all the resources out of the economy and then pouring it down the drain), except that it’s so important it’s a tragedy. The abject ineptitude of Government in this case is staggering.

Secondly decarbonising the economy will never be cheap. When you need extra resources, increased latency (meaning duplicated infrastructure) it will never be cheap. And as only the west is doing anything it won’t make that much of a difference to carbon anyway as we all share the same atmosphere. We will have the bill for feeling about doing something whilst achieving very little, a destabilised energy network leading to interruptions, failures and lost productivity, but still have the clean up bills as the significant nations by population numbers won’t change enough to make a meaningful difference.

We are therefore regulating ourselves to death, pouring money and resources down the drain, pursuing a goal that distracts the electorate enough to get to the next election or three and we think the future looks bright??

We have every opportunity to maintain our very high quality of life and are busy doing as much as possible to extinguish this possibility with all our might.

We are all collectively stupid.

Rob
September 28, 2025

Your not stupid and i hope i am not either! If however, you are surrounded by mass stupidy, it is actually easier to see opportunity when the herd is wearing blindfolds!

Craig
September 30, 2025

Less public servants usually equates to more outsourcing of Government work. Remember the PwC scandal and how well that worked out. Similar things have happened in the past with other consultants with overcharging and conflicts of interest. In that regard, bringing the work in-house probably makes sense.
The number of PS employees is largely irrelevant, it's the total cost including consultants that is more important.

Graham W
September 26, 2025

I agree with Steve and would add the sixth mega trend is the move by most nations to increase their gold reserves.
I have for a long time believed that a 10 % allocation to gold was essential in an investment strategy. I am now not unhappy that for my family it has risen to around 50 %. Gold bullion investment, especially in a SMSF is still a no brainer.

Peter Thornhill
September 28, 2025

What dividends does a gold bar pay?

Dudley
September 28, 2025


"What dividends does a gold bar pay?":

Anti-destitution insurance [ non-dividend ] payout under rare extreme circumstance such as hyperinflation.
A little going a long way.

James#
September 29, 2025

"What dividends does a gold bar pay"

None, but if it goes up in a contrarian manner (hedge) to equities, because bigger fools will buy it from you, then sell it and buy more income when good equities are cheaper! Speculation I know, but you've gotta have some fun too!

Graham W
September 29, 2025

I bought gold sovereigns for $ 140 in 1994, 30 years later they are worth around $1,800 each. so why do I need dividends Peter. Btw I also bought gold bullion in my SMSF 15 years ago that is over 500% up, again why do I need taxable dividends, the growth is tax free in pension phase. And it is real money, everything else is counter party risk or credit.

Ben Snooks
September 26, 2025

What is the outlook for private equity, private credit and listed Infrastructure? Thanks

Dudley
September 25, 2025


Using values from the table of 'Projected medium term returns', tax 0%:
Diversified Growth mix 6%
Australian cash 3.5%
Inflation 2.5%
Tax 0%


Older retirees with adequate capital are better off taking less risk.
They have little to gain over the time that remains, and more to lose from capital at risk.

Cashflow; Income capitalised, Capital withdrawal rate:
Moderate risk;
= PMT((1 + (1 - 0%) * 6%) / (1 + 2.5%) - 1, (87 - 67), -1, 0)
= 6.98% / y
No risk;
= PMT((1 + (1 - 0%) * 3.5%) / (1 + 2.5%) - 1, (87 - 77), -1, 0)
= 10.54% / y

If capital withdrawals plus Age Pension insufficient for expenses, then gambling with more risk required.

Steve
September 25, 2025

I love how all of these articles consistently avoid mentioning investing in any form of first mortgages, that can easily achieve 6% pa (some are paying over 9% pa). Their TMDs all say they meet "capital secure" (not guaranteed) requirements. But equities aren't guaranteed either. Remember 1987? The bond guys hate it (remember the 1994 bond crash?)

Wildcat
September 28, 2025

Do you remember estate mortgage in the late 80’s, Australian capital reserve, city pacific, LM mortgage trust +++ in the GFC? Was the La Trobe publicity a shot across the bow for the current market?

Remember if you are getting 9% after promotion fees, marketing, costs and profit margin how much is the borrower paying and why don’t they just borrow from the bank? I don’t know but I’m guessing the answer to the first question is 11-11.5%.

The answer to the second question is because they can’t borrow from the bank as the bank won’t lend to them even at these high rates as they are too risky for s as bank. So how much risk are you really taking?

Not saying all these products will fail but they are often less than ‘stable’, ‘over the cycle’. The problem is the cycle can be 10-20 years and people forget quickly.

Shane even said it. Don’t forget the risk vs return trade off. If you are getting a very high return you are more than likely taking a very high risk. Whether you see it or not, or have deluded yourself in your analysis, is a separate question.

Dudley
September 28, 2025


Rasmussen:

'So markets are efficient. We need to have a healthy respect for efficient markets. And so you have to ask yourself, what are yield’s price? So, why do Treasuries have a 4% yield and private credit has a 10% or 12% yield?'

'What’s the reason? And the reason is that the only thing that incremental yield can be pricing is bankruptcy risk, the risk of nonrepayment.'

https://indexes.morningstar.com/insights/perspective/blt02b187ef5312ffa1/the-single-biggest-mistake-investors-are-making-in-markets-today

davidy
September 28, 2025

Their TMDs all say they meet 'capital secure' requirements - what ever does that mean ? As before, Estate Mortgage and others all said similar things and then went broke. And the current Shield Master Fund disaster shows that chasing yield does involve risk.

ASIC is now all over LaTrobe about their so called "Term Accounts" - which clearly imply a term deposit and yet are no way near that.

Noel Whittaker
September 25, 2025

Given the running yield of the index is about 3.9%, does this mean there will be no growth?

Rob
September 25, 2025

Noel - you know the game - "index hugging" has been ok for years but for the last 12 months "sector allocation" has taken over - as the Banks blew up, gold took over, followed by gold miners and now, maybe, copper's turn... Suspect Shane is correct as the herd follows the broader Index and the weight of money is hard to move. U$ fear ain't helping all those big offshore allocations

 

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