Farrelly's Economic Scenarios:
Navigating the Full Probability Landscape
Beyond the Expected: Understanding the Full Spectrum of Market Outcomes for Smarter Financial Planning. [cite_start]Source: Farrelly's Dynamic Asset Allocation Handbook - June 2025 (Page 41) [cite: 887]
Base Case - Muddle Through
35% Probability
The developed world grows slowly, largely due to weak demographics. Corporate profits grow much the same as usual, inflation and interest rates remain low. Emerging markets continue strong economic growth. Australia grows somewhat slower than usual. The resources boom ends. [cite_start]Sometime over the next decade, most economies experience a sharp V-shaped recession. [cite: 887]
[cite_start]
Australian Equities: 2% to 8% [cite: 887]
[cite_start]
Developed Market Equities: 0% to 4% [cite: 887]
[cite_start]
Cash: 2% to 4% [cite: 887]
[cite_start]
Inflation: 3% to 4% [cite: 887]
Back to the Old Normal
17% Probability
[cite_start]
We return to the great moderation - Cash rates back to 2% to 3% and inflation around 2.5%, GDP growth at around 3%pa growth rates and PE ratios back to at 16 to 18 times earnings. [cite: 887]
[cite_start]
Australian Equities: -2% to 3% [cite: 887]
[cite_start]
Developed Market Equities: -3% to 2% [cite: 887]
[cite_start]
Cash: 1% to 3% [cite: 887]
[cite_start]
Inflation: 3% to 4% [cite: 887]
Boom
10% Probability
Governments reject calls for austerity and engage in expansionary spending. Confidence returns and economic growth picks up worldwide. Budgets come back into balance as taxes increase with earnings. A brief burst of higher inflation is calmed by moderate monetary and fiscal fightening. [cite_start]Emerging market growth accelerates. profits grow rapidly, commodity prices recover. [cite: 887]
[cite_start]
Australian Equities: -2% to 3% [cite: 887]
[cite_start]
Developed Market Equities: -3% to 2% [cite: 887]
[cite_start]
Cash: 1% to 3% [cite: 887]
[cite_start]
Inflation: 3% to 4% [cite: 887]
Recession
11% Probability
Most of the developed world, including Australia, experiences little or no growth for the decade. Inflation and interest rates are low, and profit growth is negative as companies struggle to maintain profit margins. [cite_start]PEs fall to low levels. [cite: 887]
[cite_start]
Australian Equities: -2% to 3% [cite: 887]
[cite_start]
Developed Market Equities: -3% to 2% [cite: 887]
[cite_start]
Cash: 1% to 3% [cite: 887]
[cite_start]
Inflation: 0% to 3% [cite: 887]
Western Recession - Not Australia
8% Probability
The world divides into two groups: those struggling under high government debt; and, those with low debt and deficits. For the developed world, the scenario is as per the Recession scenario above. [cite_start]For Australia and the emerging markets, it looks like the Base case/Muddle through scenario. [cite: 887]
[cite_start]
Australian Equities: 1% to 8% [cite: 887]
[cite_start]
Developed Market Equities: -5% to 2% [cite: 887]
[cite_start]
Cash: 2% to 4% [cite: 887]
[cite_start]
Inflation: 2% to 3% [cite: 887]
Wither Australia
6% Probability
[cite_start]
The rest of the world follows the Base case/Muddle through scenario while Australia experiences little or no growth, falling EPS, and low PE ratios. [cite: 887]
[cite_start]
Australian Equities: -4% to 6% [cite: 887]
[cite_start]
Developed Market Equities: 1% to 8% [cite: 887]
[cite_start]
Cash: 1% to 3% [cite: 887]
[cite_start]
Inflation: 2% to 0% [cite: 887]
Depression
3% Probability
The roadmap is the Great Depression of the 1930s. Real economic growth is negative, interest rates very low, earnings collapse, and PE ratios fall. [cite_start]This scenario strikes all economies including emerging markets. [cite: 887]
[cite_start]
Australian Equities: -3% to 0% [cite: 887]
[cite_start]
Developed Market Equities: -3% to 0% [cite: 887]
[cite_start]
Cash: 1% to 2% [cite: 887]
[cite_start]
Inflation: -4% to 1% [cite: 887]
Stagflation
10% Probability
The benchmark is the 1970s – high inflation, very high interest rates, sluggish growth and low EPS growth. PE ratios are also low. [cite_start]This condition hits the majority of the developed world. [cite: 887]
[cite_start]
Australian Equities: -2% to 3% [cite: 887]
[cite_start]
Developed Market Equities: -3% to 2% [cite: 887]
[cite_start]
Cash: 1% to 3% [cite: 887]
[cite_start]
Inflation: 5% to 10% [cite: 887]
Hyper-inflation
<1.0% Probability
Much of the world experiences hyperinflation such as was seen in Weimar Germany in the 1930s. [cite_start]Property maintains value but equities and paper-based assets are essentially wiped out in real terms. [cite: 887]
[cite_start]
Australian Equities: 32% to 64% [cite: 887]
[cite_start]
Developed Market Equities: 35% to 70% [cite: 887]
[cite_start]
Cash: 69% to 71% [cite: 887]
[cite_start]
Inflation: 25% to 100% [cite: 887]
Why Farrelly's Looks Beyond the Obvious: Your Advantage in Volatile Markets
[cite_start] Many standard long-term portfolio benchmarks and Strategic Asset Allocation (SAA) approaches primarily model only the most common economic outcomes, often focusing on central probabilities (e.g., 66% or 75% likelihood)[cite: 887]. [cite_start] This narrow focus can leave investors exposed to unforeseen risks, particularly when markets appear 'Fully Priced' or 'Overpriced' and could face prolonged periods of underperformance[cite: 32, 33, 108]. At Farrelly's, our Dynamic Asset Allocation (DAA) methodology stands apart. [cite_start]We rigorously integrate a comprehensive range of economic scenarios, including less probable but impactful 'tail risk' events like depressions or severe stagflation[cite: 887]. [cite_start] By anticipating and modeling these wider possibilities, even those with probabilities as low as <1.0% [cite: 887][cite_start], we build more resilient portfolios designed to navigate the full spectrum of market conditions, not just the expected ones[cite: 297, 300]. This commitment to deep reasoning and comprehensive analysis ensures our advice is nuanced and robust, preparing you for all eventualities.Legend
Australian Equities
Developed Market Equities
Cash
Inflation
75% Probability Range: The stated range of returns indicates that 75% of the Monte Carlo simulations for that scenario produced returns within this range. [cite: 887]
(All returns are 10-year nominal unless otherwise specified).