Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
EM, small-caps tipped to top return leader board
The team at Evergreen Consultants has released cutting-edge research that reveals the direction markets will take with higher inflation. The 2021 issue of Evergreen Consultants’ Long-Term Expected Returns Framework has made ground-breaking projections that dispel inflationary concerns. Projections show the Australian and global equity markets outpacing most other asset classes in the decade ahead.
Evergreen expects “inflation to reset moderately higher, at 2.25% over the medium-to-long term (50 basis points higher than its previous forecast), accompanied by increased volatility.” Evergreen is forecasting 7.75% average annual growth for Australian equities over the long term, with annualised volatility of 13.5%. This is based on a view that Australia’s long-term equity risk premium (ERP) of 4.5 % will remain unchanged.”
Evergreen is forecasting:
- This is based on the view that Australia’s long-term equity risk premium of 4.5% is unchanged.
Evergreen Consultants founder and chief executive, Angela Ashton, says: “While higher inflation has traditionally provided a case to lift equity risk premia, we have decided to retain our estimate for the Australian equity long-term ERP as we believe that the impact of financial repression, where nominal rates are kept relatively low, will see investors continue to favour equities.”
At the top of the list, with the highest returns possible, are emerging markets with a forecast 9.05% return, albeit with the highest volatility, of 17.5%. Australian small companies is projected to return around 8.65% per year with similar volatility of around 17%. Following on is global equities at 8.05% and Australian equities with 7.75%, with lower volatility of around 14% and 13.5% respectively.
Evergreen says, “on a risk-adjusted basis, investment-grade Australian and global credit remain reasonable investment bets. The outlook for Australian credit is for an average return of 3.95% a year, with annualised volatility of 3%, while global credit is expected to return 3.75% a year, with annualised volatility of 3%.”
The firm expects REITs to underperform equities, but with slightly less expected volatility. “The outlook for Australian REITs is for an average return of 6.4% a year, with annualised volatility of 13%, while global REITs are expected to return 6.55% a year, with annualised volatility of 12.5%,” the report states.
If you think back, before the pandemic, inflation was low. Inflation in the US remained stubbornly below the Federal Reserve’s 2% target since the mid-1990s. Evergreen believes that the economic and political fallout from the pandemic will see the reversal of this trend.
“The current inflationary environment is ‘running hot’ with some data printing at multi-decade highs in parts of Europe and the US,” says Evergreen. “But, as supply chain disruptions slowly fade, we expect these elevated price pressures to abate by the end of 2022. Over the longer term, we anticipate that the forces of innovation and technological change will prevent much larger and sustained rises to the general price level.”
Therefore, the team upped its projections for inflation by 50% to 2.25%, with associated volatility of 1%, up 25 basis points. The 2.25% is within the RBA’s target inflation band and the volatility projected is close to, but above, levels experienced in the five years prior to the Covid-19 breakout.
