Northern Trust forecasts stock returns of 4.5% - 8.9% over next 5 years

Fixed income returns subdued, inflation and rates to remain low

THE global economy will experience 2.2% real average annualized growth over the next five years, along with controlled inflation and accommodative monetary policy, according to Northern Trust’s Capital Market Assumptions five-year outlook.

The firm predicts that interest rates will remain low, with inflation continuing to be minimal as a result of continued muted global growth and timid policy responses. 

Slowing growth, and the differences between the US and China are just some of the themes Northern Trust’s Capital Market Assumptions group identified behind the trends shaping the markets and economy in the next five years – all important factors that underlie the firm’s long-term outlook.

On a global basis, the annual Capital Market Assumptions report foresees equity returns in the range of mid-single digits and low-but-positive fixed-income returns.

The highest average annualized equity return is forecast for Latin American emerging markets at 8.9%, with overall emerging markets at 6.1%. The next highest equities forecasts are for the UK at 7.4% and EMEA at 6.9%.  The lowest forecasts are for Canada and Japan, both coming in at 4.5%. 

Equity returns are expected to be muted by historical standards, due to slower growth and modest margin and valuation pressures.

The asset class forecasts are informed by six themes that Northern Trust believes are shaping the investment landscape for the coming years. The report points to geopolitical and technological developments resulting in a shifting economic model that is in turn slowing growth.

The firm believes that the Globalization 2.0 moniker that has been applied to the new world order of global trading is too ambitious or optimistic. It considers Globalization 0.5 more appropriate.

As such, concerns including security and inequality need to be effectively addressed before it can be confidently said that global growth restructuring, one of the report’s themes, is firmly in place. “As with any restructuring, the global economy must endure continued slow growth pain – and risk of recession – to emerge stronger in the new world we find ourselves in,” the report notes.

A related theme is irreconcilable differences, which identifies the tense relationship between the US and China as a major factor in global growth restructuring.

“We expect this friction to unfortunately persist since we regard as irreconcilable their views on what constitutes the best economic model, as well as the role of government and their respective roles in global affairs,” Northern Trust chief investment strategist Jim McDonald said. 

Stuckflation remains a theme in this year’s report, appearing for the fourth consecutive year. It is built on, among other things, the continued failure of most central banks to meet 2% inflation targets, along with technological innovations and troves of data enhancing price transparency and discovery.

“While we expect central banks to eventually come together to form a coordinated policy response, we don’t see it happening anytime soon,” Northern Trust chief investment officer Bob Browne said.

The fact that the equity bull market has continued for over a decade, fueled in large part by pro-growth policies, has led investors to tolerate political power grabs, according to the report’s other repeat theme, executive power play. However, this second-year version has evolved to recognize that the growth paradigm of the last decade will be challenged when growth slows or if leaders tilt their focus too much to populist movements at the expense of sensible economic policy.     

The report’s fifth theme, monetary makeover, recognizes that stuckflation has stripped central banks of their purpose and made it impossible to address the insufficient level of global demand. Because of this, Northern Trust believes central bankers will increasingly be subservient to political agendas. The report goes on to say: “No political leader wants anything other than easy monetary policy. As long as inflation remains stuck, they will get it.”

Wouter Sturkenboom, chief investment strategist for Northern Trust in Europe, Middle East, Africa and Asia-Pacific, comments on the sixth theme, staking out climate risk: “Northern Trust fully expects climate risk to continue to grow in importance as an investment consideration, albeit with wide variance among countries. But, the risk is too real and too great for countries not to take heed,” he added.

The report outlines the firm’s long-term asset class return expectations and forecasts for the next five years. Rooted in the firm’s capital market analysis, it informs the investment decisions and asset allocation recommendations made by Northern Trust, which as of June 30 2019, had US$1.2 trillion in assets under management.

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