Evergreen favours equities despite inflation
Considering recent inflation movements, Evergreen Consultants has projected returns from Australian and global equities will continue to outpace most other asset classes in the decade ahead.
The 2021 ‘Evergreen Consultants Long Term Expected Returns Framework’ report expected 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.
Meanwhile, Evergreen forecasted average annual growth for Australian equities to grow by 7.75% over the long term, with annualised volatility of 13.5% (based on the assumption that Australia’s long-term equity risk premium (ERP) remained unchanged at 4.5%).
Evergreen Consultants founder and chief executive, Angela Ashton, said: “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.”
Evergreen said there were several factors driving the inflation reset.
“In the years between the GFC and the COVID crisis, there had been a secular decline in inflation and inflation volatility,” it said.
“We believe that the economic and political fallout from the pandemic will see a reversal of this trend.
“Changes in economic policy approach, evidence of deglobalisation, increased frictions in cross-border movement of labour, increased inflationary expectations and a catch-up in capex in some long-neglected ‘old economy’ sectors, will see inflation reset moderately higher than was the pre-pandemic experience.
“The current inflationary environment is ‘running hot’ with some data printing at multi-decade highs in parts of Europe and the US. But, as supply chain disruptions slowly fade, we expect these elevated price pressures to abate by the end of 2022.”
Over the longer term, Evergreen anticipated that the forces of innovation and technological change would prevent much larger and sustained rises to the general price level.
“Hence, we have increased our projections for inflation by 50 basis points to 2.25%, with associated volatility of 1%, up 25 basis points.
“We note that 2.25% is within the Reserve Bank of Australia’s target inflation band and that our volatility projection is close to, but above, levels experienced in the five years prior to the Covid-19 breakout.”
Evergreen forecasted 8.05% average annual return for global equities, with annualised volatility of 14%; and 8.65% a year for Australian small companies, with annualised volatility of 17%.
The only prospect for higher returns was emerging markets, which Evergreen expected to return 9.05% a year over the long term, but with elevated annualised volatility of 17.5%.
On a risk-adjusted basis, investment grade Australian and global credit remained reasonable investment bets. The outlook for Australian credit was for an average return of 3.95% a year, with annualised volatility of 3%, while global credit was expected to return 3.75% a year, with annualised volatility of 3%,
AUTHOR
Liam Cormican
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