The Outlook for Property and Shares

Today Property Planning Australia looks to the views shared with us by AMP Chief economist Dr Shane Oliver and sees a growing argument to invest into property and shares for superior 5 year returns.

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“The return from an asset is a function of the income flow or yield the asset generates, and capital growth. Of course in the case of cash or term deposits, the yield is all that drives the return. On this front, the return outlook for cash is looking less promising.

There are two risks for property. The main downside risk is that China has a hard landing with the hit to export earnings resulting in sharply higher unemployment, forced sales and hence lower house prices. The risk of a hard landing in China seems to be receding though. The other risk is on the upside. There is always a concern that the old housing bubble is reignited by the latest collapse in mortgage rates. Again this seems unlikely though given Australians have developed a more cautious approach to debt since the global financial crisis.

Shares are probably the most attractive asset. After a five year period of poor returns, despite the rebound over the last year, Australian shares are offering a relatively attractive starting point with dividend yields of around 5.7% (including franking credits). This is not to say that shares are in for a smooth run. Risks remain in the US and Europe regarding public sector debt problems, but they seem to be fading. However, with reasonable starting points yields (or income flows), only modest capital growth of 3 to 4% pa is required to provide a decent return. If global growth continues this should be achievable. The main downside risk here would be if global and Australian growth slides into recession taking profits with it. This seems unlikely given how easy monetary conditions are. Counter to this there is always the possibility that the easy monetary environment really takes hold globally, resulting in a huge surge in economic growth and investor flows back into growth assets. This would be very positive for shares.

We all know that Australia shares fell over the past five years as a whole. But the ‘rolling’ five year changes in Australian share prices tend to be “mean reverting”. Historically, whenever five year rolling capital losses have been as negative as they were over the last five years (ie: in 1894, 1930, 1942, 1974 and 1992), the subsequent five year capital growth has been strongly positive (in fact with an average gain of 13.4% pa). This points to solid gains in share prices over the next five years”.

Concluding Comments:

Drawing this together suggests medium term (five-year) returns of around 4.5% pa or less for cash and term deposits, 3% or less from bonds, 5% from residential property and around 10% pa from shares.

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

Source: “Shares, property, bonds or cash?” by Shane Oliver

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