CHICAGO & LONDON–(BUSINESS WIRE)–Northern Trust’s Capital Market Assumptions (CMA) report, a multi-asset class and five-year investment outlook updated annually, predicts global private equity will lead returns annualized over five years at 9.6%. Global high yield and UK equities are expected to lead bond and equity returns, at 7.5% each. Returns should be in an environment of global growth that is slowing to 2.6% per year.
Rooted in Northern Trust’s in-depth analysis of financial markets, the CMA report informs the investment decisions and asset allocation recommendations made by the company, which as of June 30, 2022 had $1.3 trillion assets under management. The forecasts are created using Northern Trust’s “forward-looking and historically aware process”, in which historical returns and relationships are subject to the company’s forward-looking themes that distinguish the CMA report each year. This year’s report includes six themes:
Slow growth transitions: Slow transitions from pandemic to endemic are affecting the global economy recently; globalization to regionalization; and fossil fuels to renewables. They represent economic challenges for a global economy already grappling with debt and demographic headwinds. These transitions will likely result in slow and continued growth.
“In our view, investors will see the stimulus-boosted growth of the past two years return to the previous slow form,” said Chris Shipley, Chief Investment Strategist of Northern Trust Asset Management for North America. “Our forecast of 1.9% in the United States marks a slowdown from the past five years, but remains ahead of most other advanced economies. On top of that, our 3.7% forecast for China also marks a slowdown from the past five years. »
Inflation recalibration: Automation and digitalization are still effective disinflationary forces, but they may take time to overcome recent shocks from tight global supply chains, tight commodity markets and depressed labor supply. Recalibration will likely take up much of the five-year horizon.
“While we expect inflation to take time to return to central bank targets, we believe the worst is over,” said Wouter Sturkenboom, Northern Trust Asset Management’s chief investment strategist for Europe, the Middle East, Africa and the Asia-Pacific region. “The ‘Stuckflation’ is over, replaced by a period of recalibration towards target levels which, for the US and Europe, stand at 3% and 2.6%, respectively.
- Currency drought: The firm predicts that the post-global financial crisis monetary flood has evaporated – and that the next five years could bring much drier conditions. The last two years of quasi-modern monetary theory policy – partially responsible for high inflation – are unlikely to be repeated soon.
- Regional reconstruction blocks: Globalization is moving towards regional systems driven by security needs — both economic and military. While this economic de-globalization may move slowly, we believe that decisions on whether – or how best – to de-globalize portfolios will come faster.
- Green transition still in progress: Rising costs and insecurity of energy supplies have led policymakers to prioritize meeting energy demand in the short term, even if it means increasing carbon emissions. But, in the medium term, climate initiatives remain an important consideration.
- Not so negative: Higher interest rates – including an exit from negative territory for Europe and Japan – bring investors closer to positive real returns (after inflation). Good for economic functioning (and savers), but a headwind for risk asset valuations.
“We believe that over the next five years, investors can expect financial market returns to be slightly below long-term historical averages – according to our ‘Slow Growth Transitions’ theme,” said Jim McDonald, Chief Investment Strategist of Northern Trust. The CMA report notes that “the more a country is exposed to slow transitions and headwinds related to debt and demographics, the greater the economic pressure it is likely to experience. This puts younger, resource-rich economies in better shape than older, energy-dependent economies.
Developed markets equity returns are expected to range from 6.0% (US) to 7.5% (UK). Interestingly, the report indicates that returns will benefit from inflation, as sales (revenues) are determined by nominal, not real, growth rates. Similarly, the expectation of the CMA report of 5.8% for emerging market equity returns are boosted by strong potential earnings growth.
The CMA report notes that with “Stuckflation”, a theme from the previous five years, to relocate “Inflation Recalibration” and inflation expectations more in line with current market prices, inflation-linked bond yields should closely mirror the yields of Treasury bills of similar duration. Specific forecasts range from 3.4% and 3.5% on the high side (US and Canada, respectively) to 0.1% on the low side (Japan). Europe (2.2%) and the United Kingdom (3.3%) fall within this range.
Within fixed income, CMA’s highest expected return is 7.5% for global high yield, where better index quality, strong interest coverage ratios and reduced issuance are considered beneficial.
Northern Trust expects all real assets to do well over the five-year horizon, but finds natural resources particularly attractive given short- and long-term commodity needs. The firm forecasts a return of 7.3% for natural resources, 6.8% for global real estate and 6.0% for global listed infrastructure.
The full report, which outlines the company’s asset class long-term return expectations and forecasts for the next five years, is available at CapitalMarketAssumptions.com.
About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking services to businesses, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 23 US states and Washington, DC, and 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2022, Northern Trust had assets under custody/administration of US$13.7 trillion and assets under management of US$1.3 trillion. For more than 130 years, Northern Trust has distinguished itself as an industry leader for its exceptional service, financial expertise, integrity and innovation. Visit us at northtrust.com. follow us on Twitter @NorthernTrust or Northern Trust Corporation on LinkedIn.
Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 USA, incorporated with limited liability in the USA Global legal and regulatory information can be found at https://www.northerntrust.com/terms -and-conditions.
About Northern Trust Asset Management
Northern Trust Asset Management is a global investment manager that helps investors navigate changing market environments, so they can confidently achieve their long-term goals. Supporting $1 trillion in investor assets as of June 30, 2022, we understand investing ultimately serves a greater purpose and believe investors should be compensated for the risks they take – in all market environments and all investment strategies. That’s why we combine sound capital markets research, expert portfolio construction and comprehensive risk management to design innovative and effective solutions that deliver targeted investment results. As committed contributors to our communities, we consider it a great privilege to serve our investors and our communities with integrity, respect and transparency.
Northern Trust Asset Management is comprised of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, KK, NT Global Advisors, Inc., 50 South Capital Advisors, LLC , Belvedere Advisors LLC, Northern Trust Asset Management Australia Pty Ltd and the investment staff of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.