5 constraints on growth...
Starting in the early 1980s investment returns were spectacularly strong. Sure there were bumps along the way like the 1987 share crash, but Australian balanced growth superannuation funds returned an average 14.1% pa in nominal terms and 9.4% pa in real terms (i.e. after inflation) between 1982 and 1999. And that was after taxes and fees. This was well above what would normally be expected from such funds.
Since 2000 nominal super returns have been more constrained averaging 6.2% pa as we entered a lower return world with real returns averaging 3.6% pa. Mind you this is still pretty good considering that 1 year bank term deposit rates averaged just 3.7% pa and only 1.1% pa after inflation and that was before taxes. The odds are that returns are likely to be even more constrained over the next 5 to 10 years. This note looks at why.
What drove the strong returns from the early 1980s?
There was an element of mean reversion (or payback) after the poor returns of the high inflation 1970s. But fundamental drivers were:
Economic rationalist policies - deregulation, privatisation, competition reforms, tax reform and free trade - as policy makers focussed on supply side reforms in reaction to the inflation of the 1970s.
Globalisation which boosted trade & competition and lowered costs.
Easing geopolitical tensions with the ending of the Cold War in 1989 which led to the peace dividend of reduced defence spending.
Corporate focus on return on capital.
Positive demographics as baby boomers entered peak consumption and peak productivity.
Inflation targeting by independent central banks with a focus on keeping inflation and inflation expectations at low levels.
And, of course, the tech boom of the 1990s.
Taken together this drove low inflation and strong productivity growth which underpinned a secular bull market in shares – which are the biggest exposure in balanced growth super funds – through the 1980s and 1990s. See the next chart. It paused in the US in 2000-2013 but then took off in Australia with the 2000s resources boom only to take off in the US again from 2013 helped by ever lower interest rates into the pandemic (which pushed up the value of shares and other growth assets). Meanwhile bond returns were high given their high starting point yields in the early 1980s.