Statewide Super CIO Con Michalakis (Photo: Matthew Fatches)
Statewide Super CIO Con Michalakis.

Much like the 1920’s we are revelling in the grandeurs of a fictional past with the markets raising ideals that we have never accomplished.

So, what does 2020 have in store for the economy and markets?

We’re in no doubt that forecasting markets as volatile as shares for the year ahead is futile. This time last year, the markets were selling off the back of interest rates being too high and ongoing trade wars affecting the global economy.

A year later, interest rates have fallen across the world and share markets have in some cases posted returns over 25 per cent. Trade wars and geopolitics are still with us and from what I can see will be present for the foreseeable future.

I caution investors to beware of the market/economy gurus! The great economist JK Galbraith summed it up well when he said “The only function of economic forecasting is to make astrology look respectable”.

We are in the hands of tweets and WTF risk. Good luck with understanding that scenario.

Long-term returns from here look challenged. The previous decade has seen tremendous appreciation in all asset classes on the back of a recovery from the global financial crisis and an unbelievable low to negative yield bond market forcing many investors to embrace higher risk.

The good news is the payoff over the past decade for default super has rewarded long term investors. Ten year returns net of fees and taxes are approximately 8 per cent per annum and 20 year returns well above 7 per cent and clearly meeting their 3 per cent plus inflation objective, according to SuperRatings.

But, where to from here?

The next ten years look a lot harder, first of all we are starting with cash rates and bond yield curves that are near record lows and offering negative real returns. Bonds for capital gains and equities for income is the crazy new mantra and fails the pub test for common sense, requiring further momentum from low yields needing rates to travel into unchartered negative territory.

As for equities, the underlying volatility of equity returns may more than swamp the so called “yield” on offer. To make matters worse, the diversification benefits of cash, bond and equities is not what it once was and perhaps the only use for cash and bonds (a useful one too) is to offer some protection as an equity hedge should markets turn volatile. Indeed a return of capital over a risk adjusted return on capital could well be the only game in town.

In this environment asset owners are diversifying into illiquid assets and other alternative strategies. Good luck with that too. There’s no free lunch unless the quality and valuation of private assets are at a reasonable discount to public ones. In many cases they are not! Indeed it seems to be kept private by a coterie of transactions to keep either leverage or prices paid insanely high.

So, welcome to the 20’s but unlike the 1920’s I think we can reasonably assume it will not be roaring. It’s the modern version of robber barons and Gatsby’s. Their wealth is already a populist issue. A better more sinister environment may well be the 1930’s with one exception – a very small chance of a depression.

Bring on the next decade.

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