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Aon Retirement and Investment Blog

New Zealand Investment Forecasts – what are they telling us?

Aon Hewitt has been collecting economic and investment forecasts from New Zealand-based banks, brokers and fund managers for close to 20 years. The first set of data was collected in April 1996, and we have continued to compile the survey each quarter since then.

The most recent forecasts were collected in January this year, and they show that fund managers and brokers are becoming increasingly gloomy about the prospects for investment market returns over the next 12 months and over the next five years. For New Zealand equities, expectations are the lowest that they have ever been.

This pessimism reflects the general view that we are in a period of low global economic growth, and very low inflation – and this seems likely to continue for some time. In that kind of environment, strong returns from equity markets are seen as unlikely. And with interest rates at very low levels, returns from bonds are also likely to be low.

The obvious implication (assuming the forecasters are correct) is that investors should be prepared for a period of lower investment returns than they have been used to in recent years. However, there are two possible reasons to be more optimistic:

  1. The forecasters are not always correct. Especially when it comes to equity markets.
  2. Share prices are driven to a large extent by surprises, especially in the short term. With so much gloomy news already priced in, if global economic growth was to be better (or less bad) than expected this could be positive for share markets.
The tables below show the forecast returns for the various asset classes, based on the average of the analysts’ forecasts.

For the next 12 months, the forecast return for each asset class is significantly lower than the average forecast over the last 20 years. On a notional ‘balanced’ portfolio (with 50% in growth assets and 50% in income assets) the overall forecast return is just 3.5%, compared with a long run average of 7.2%. In October 2008, the forecast was 10%.

The current forecast for the next five years for each asset class is between 2% and 3% lower than the long term average, and the overall forecast is for a return of 5.2% per annum, which is well below the average forecast of 7.6% per annum.

While forecasts are low in nominal terms, inflation expectations are also well below average. For the next 12 months, the forecasters expect CPI inflation in New Zealand to run at 1.4%, which is the lowest since our survey began. The 5 year forecast is 1.9%, just below the middle of the range for the RBNZ’s inflation target.

How good are the forecasts?

The forecasts are much less volatile than actual outcomes, and they are almost always positive. As a result the forecasters, in aggregate, typically under-estimate returns in the good times, and over-estimate returns in the bad times. This is not surprising, and it is consistent with other studies into investment forecasting globally.

As the two charts below show, there is no discernible correlation between the forecasts for our notional balanced portfolio and the actual returns achieved over the subsequent 12 months or five years. In July 2003, the 12 month forecast was 6.4% - the lowest level that we had seen since the survey commenced in 1996. However the actual return over the next 12 months was 13.6%*, and returns remained well above the forecasts for more than 3 years. The worst actual 12 month return was in the 12 months from October 2007 (-14.5%), however, in October 2007 the forecasters were expecting above average returns of 8.7%. It is a similar picture over five years with the worst actual return, 3% p.a. from January 2007, accompanied by an above average forecast of 7.8% p.a.


However, this disparity between forecasts and actuals is really driven by the forecasters’ inability to predict equity market movements. For fixed interest markets, there has been a clear relationship between the forecasts and the subsequent returns – particularly over the longer timeframe.

This makes sense intuitively since an important component of the return on any bond is the yield at the time of purchase. As yields have been coming down for many years, it is not surprising that forecast and actual returns have both been trending lower.

With equities, returns are much more volatile, and therefore far harder to predict, especially in the short term. Over the long term there should be a relationship between the price of a company’s shares and the fundamental value of the company, but over shorter timeframes prices are more dependent on what investors are prepared to pay, which may bear little relationship to ‘value’. During the dotcom boom for example many share prices were bid up to extraordinary levels, even though the companies were making no money – and had little likelihood of ever making money. Over the long term however, many of these shares reverted to fair value (i.e. zero).

What does all of this tell us? Clearly, expectations of future returns from the major asset classes are very low and appear to be trending lower. There are many reasons for this, but with interest rates at or close to all-time lows in many markets, equity valuations high on many measures, and global economic growth expected to be subdued for the next few years at least, these low return forecasts are not surprising.
When it comes to equity markets, the forecasts should probably be taken with a pinch of salt. There are good reasons for equity market returns to be lower over the next five years than they have been over the last five – and on balance, we do expect that this will be the case. But we also know that there are factors other than fundamentals that drive share prices so the actual outcome is far from predictable.

For fixed interest investments there is more reason to take notice of the forecasts. Yields are low, and returns are likely to be low as a result. What does this mean for portfolio management?

  • First, it does not mean that portfolios should not hold bonds. Bonds are held primarily to provide protection, and they will continue to fulfill that role – even if the amount of protection they can offer is reduced.
  • Second, with equity portfolios, the key is to find skilled managers, and give them broad mandates so that they have the opportunity to add value during what may be a challenging period.
  • Finally, we often recommend an allocation to alternative assets (i.e. assets other than cash, bonds and equities), in order to improve portfolio diversification and provide additional sources of return.

Guy Fisher is an Investment Consultant in Aon Hewitt’s Wellington, New Zealand office.
*We have used the average return of the balanced funds in the Aon Investment Survey</o:p>


The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs.Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.

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