Normality returns

After three years of tumultuous market conditions that have pushed statistical boundaries, the markets are returning to "normal" according to AMP Henderson chief investment officer Paul Dyer.

Dyer says that looking forward a person who put money into a range of investments today would expect normal returns going forward.

"At current levels, global equity markets should deliver returns of around 7-8% over the next decade, close to the historical average."

He says this is much lower than the bull market period of the 1990s. However, that era of double-digit returns was unusual and investors in the past couple of years have been "giving back" the excess returns.

Dyer predicts fixed interest returns will be around the 6% mark and New Zealand shares should provide returns of about 10% (excluding imputation credits).

Dyer also reckons that risk characteristics are changing and the relationship between shares and bonds is returning to normal. That is they are both moving in the opposite direction. In recent years they had become closely correlated because of disinflation.

This change means there is benefit in diversifying across asset classes.

However, a new characteristic is appearing in the market that is working against diversification across equity markets.

Dyer says international equity markets are becoming more correlated, or all moving in the same direction at the same time. Therefore the need for an investor to spread their money across markets is lessened.

 "The benefits of diversification are getting weaker over time," he says. However, he points out they "are still not zero."

"(Investors) are likely to get more diversification benefits by looking at other asset classes."

He says no assets look "strikingly cheap" at present. International shares are reasonable, New Zealand shares are, if anything, a little cheap and fixed interest "looks a little expensive". Property looks good and yields remain "substantially higher" than other assets.

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