Liquidity has been the key driver of market behaviour and what happens next depends as much on monetary policy as the real economy. Gosling says: “There remains considerable risk of further short-term equity market volatility and fluctuating expectations about both the strength of economic growth and inflation versus deflation should be expected. My own view is that ultimately higher inflation will be a feature of the path back to normality but there is a wide range of views on this.” The chart shows expected listed equity returns remain below long-term normal levels with positive returns in the December quarter reducing return potential.

This is offset by changes to probabilities for Australian equities in particular but is reinforced for unhedged global shares by the assumption by MLC of a higher equilibrium level for the Australian dollar. The return potential of unhedged global equities is assumed to be more modest than previously but the sector is relatively risk controlled. Prospective returns for debt assets also generally remain below normal levels, particularly long-dated global treasuries which have limited potential and relatively high downside risk. “The ultimate solution to the crisis might involve higher inflation. That possibility, as well as the massive increases in government bond issuance that are in prospect, pose significant threats to world bond markets,” Gosling says.