Future return expectations are currently subdued, as uncertainty and risks remain heightened and the range of potential economic and market outcomes is unusually wide.
Over recent years, the main driving force behind the strong performance of equities, credit, property and infrastructure has been the extraordinary liquidity and interest rate backdrop. This was a result of extremely supportive monetary policies implemented by the world’s main economic regions following the Global Financial Crisis. However, given the recent improvement in global economic growth, central banks are now scaling back their current monetary policies. This policy “tightening” along with low inflation, high debt levels in both the corporate and household sectors, and geopolitical risks (especially around trade) are key risks for financial markets.
The potential effects are uncertain, but expectations are that risk assets may be more sensitive to these changes and there could be downward pressure on bond and equity prices, hence a potential reduction in future returns. At the same time, valuations of risk assets currently appear expensive, further indicating that the potential for strong returns going forward may reduce.
In the current environment where the valuations of most asset classes are expensive and the level of uncertainty is heightened, maintaining a well-diversified portfolio of assets is key. The Plan’s options are structured and managed in such a way and aim to provide the best possible outcomes for members, however returns may be subdued over the near term as financial markets digest changes to the global economic and political environment.