CHICAGO & LONDON–(BUSINESS WIRE)–The global economy will see annualized real growth of 2.9% over the next five years, along with annualized inflation of 1.7% in developed markets, according to Northern Trust’s Capital Market Assumptions report, which is a five-year perspective. The company predicts that still-low interest rates will support positive but weak returns, as technology remains a powerful force that will reduce inflation. In the meantime, more central banks are expected to broaden their goals to include tackling income inequality and climate change, leading them to continue providing monetary stimulus.
The annual Capital Market Assumptions Report presents five-year average annualized return expectations and forecasts for a wide range of asset classes. Rooted in the firm’s in-depth capital market analysis, it informs the investment decisions and asset allocation recommendations made by Northern Trust, which as of June 30, 2021 had US$1.5 trillion of assets under management.
“In our view, investors can expect continued global economic growth, but at a rate that is reverting to its long-term average – what we call a “return to mediocrity”,” noted Jim McDonald, Chief Investment Strategist of Northern Trust. “And, for the sixth consecutive year, we do not see inflation making drastic movements: we are calling for ‘blocking’ continue, with inflation at an annualized 1.7%, below the 2% target of most central banks.
Stock market returns over the past five years have exceeded even the most optimistic forecasts. While valuations predicted annual returns of 5% on the stock markets, they actually reached 15%. But, based on historical trends, Northern Trust expects a return to subdued but positive returns over the next five years, lowering its five-year annualized global equity return forecast slightly to 4.6%. This reduction of 0.3 percentage points from last year’s report is explained by the expected return in the United States of 4.3% – in the lower end of the developed market regions. The report expects mid-single-digit annualized returns.
For developed markets, the Capital Market Assumptions report predicts the highest equity returns for the UK, set at 6.2%, as it returns to its post-Brexit benchmarks. Europe, at 4.7%, should also benefit from increased stability as well as a longer-term post-pandemic recovery. Emerging market equity returns will continue to be driven by China, which makes up around 35% of the MSCI Emerging Markets Index, and where regulatory risk has depressed valuations.
The outlook for fixed income securities calls for persistently low interest rates supporting positive but weak returns over the next five years. The report notes that longer-dated, lower-credit bonds look relatively attractive.
In the report’s real assets forecast, Northern Trust identifies that continued pressure on commodity supplies will likely support natural resource returns, raising the total return forecast, compared to last year’s report, by 1.4 percentage points at 5%.
The Capital Market Assumptions report’s asset class forecasts are driven by six key themes that Northern Trust’s investment experts believe will affect markets and the economy over the next five years, and drive the class outlook. assets of Northern Trust:
- Back to mediocrity: After a brief breakout, global economic growth will return to its longer-term average. Debt fueled demand will decline and automation will contain inflation. This will lead to persistently low interest rates, especially as the insatiable demand for fixed income securities persists.
“Mean reversion will reduce equity returns as global economies slow,” adds McDonald. “Last year’s earnings leave less room for margin and valuation expansion.”
- Sticking to Stuckflation: “Stuckflation” appears in capital market assumptions for the sixth consecutive year. The report notes that without a coordinated policy response from central banks, future inflation will reflect the past decade more than the past year, supporting financial markets. Northern Trust expects developed markets, on a weighted average basis, to see annualized inflation of 1.7% over the next five years, compared to the 2% target of most central banks.
‘We stick to’inflation lock‘ despite very accommodating central banks, said Wouter Sturkenboom, Chief Investment Strategist for Europe, Middle East, Africa and Asia-Pacific. “Inflation and central banks are forever locked in a dance, leaving it up to investors to determine direction. And with the Bold Stock Reset timeline, ‘blocking’ will live for now.
- Monetary activism: Monetary policy is entering a new, more “activist” phase. Central banks have realized that the financing they provide can be leveraged to target systemic risks to growth and inflation, such as climate change and income inequality. Northern Trust expects central bank accommodation to continue over the five-year horizon.
- While searching Technological independence: Technology is the new oil – but with greater impacts on economic security. Both sides of the West Chinese divide appreciate the importance of technological independence and the raw materials needed to achieve it. We expect major investments for this purpose and a new economic division.
- The evolving capitalist: Investors and business leaders recognize that they need to move away from the current “win-win” capitalism. Solutions to close income gaps and the needs of all stakeholders – as opposed to just shareholders – will slowly lead to a more sustainable version of capitalism.
- Reaching consensus on climate: A consensus is emerging on the importance of fighting
climate change, and it is increasingly market driven. Investors are fueling the green transition, driving real business action faster and with greater force than politicians ever could. The report notes: “difficult economic trade-offs loom large.”
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 22 US states and Washington, DC, and 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2021, Northern Trust had assets under custody/administration of US$15.7 trillion and assets under management of US$1.5 trillion. For over 130 years, Northern Trust has distinguished itself as an industry leader for its exceptional service, financial expertise, integrity and innovation. Please visit our website or follow us on Twitter.
Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 USA, incorporated with limited liability in the USA Please read our global and regulatory information.
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. With US$1.2 trillion in investor assets as of June 30, 2021, 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 and the investment staff of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.