Rates and Inflation to Remain Low;
Stock Returns in the 3.8-8.2% Range;
High Yield and EM Debt Outliers amid Low Bond Returns
The global economy will experience 2.6% real average annualized growth over the next five years, along with a continuation of 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 the U.S. Federal Reserve not raising its federal funds rate for at least five years. And, despite several emerging forces trying to raise inflation, it expects it to remain below central bank targets as these forces are offset by the impact of technology and automation, weak consumer demand, and a slow employment recovery.
The Capital Markets Assumptions report, featuring five-year average annualized return expectations and forecasts for a wide range of asset classes, is produced annually. Rooted in the firm’s deep capital market analysis, it informs the investment decisions and asset allocation recommendations made by Northern Trust, which as of 30 June 2020, had US$1.3 trillion in assets under management.
On a global basis, the report foresees average annualized equity returns in the mid-single digits except for emerging markets in Latin America – 8.2% – and in Europe, the Middle East, and Africa (EMEA) – 7.1%. The next highest equities forecasts are for Australia at 5.8%, the U.K. at 5.6%, and Europe, excluding the U.K., at 5.4%. The lowest forecasts are for Japan at 3.8% and the U.S. at 4.7%. The forecast for overall emerging markets is 5.4%.
In fixed income, except for a 5.6% return expectation for global high yield, including 5.5% for the U.S. and 5.2% for Canada, the report is calling for returns mainly in the 1% – 3% range. Emerging market debt is an exception at 4.5%. The highest cash return expectation is a paltry 0.2% for Australia and Canada, followed by the U.S. and the U.K. at 0.1%. Negative cash returns are expected for Japan (-0.1%) and Europe (-0.5%).
Except for the 8.2% return expected for Latin American emerging market equities, the highest return forecast is for private equity at 7.9%. In contrast, the forecast for hedge funds, the other main alternative investments asset class, is much lower at 2.6%.
The report also includes real assets for which expectations range from 3.6% for natural resources to 5.8% for global listed infrastructure to 6.3% for global real estate.
The Capital Market Assumptions report’s asset class forecasts are driven by, and its strategic positioning is informed by, six key themes that Northern Trust has identified as shaping the investment landscape for the coming five years, and perhaps beyond. To begin, Retooling Global Growth is about companies prioritizing stability over profitability, resulting in long-term global economic growth being tempered. Northern Trust believes that companies will look to re-route supply chains, move production inside their home countries and build healthier balance sheets. And, following the surge in growth expected from COVID-19 economic relief measures from countries across the world, the firm expects global growth will settle at low levels, with a five-year annualized rate of 2.6%. "Investors need to come to the realization that many of the jobs lost because of the virus are never coming back, with the permanent loss of many brick and mortar retail stores a major reason," said Northern Trust Chief Investment Strategist Jim McDonald. "And we can’t forget that the pandemic stimulus packages have added trillions of dollars to what were already staggering government debt levels in many countries."
As shown during the pandemic, central banks have not been hesitant to reach into their "toolkits" to provide monetary support to countries ravaged by COVID-19. Massive Monetary Toolkit is the phrase that Northern Trust coined to describe this second investment theme. But, beyond monetary policy, it includes coordination with fiscal policy since central banks can purchase securities through money that they have newly created. The Northern Trust forecast notes that this de facto monetary-fiscal policy approach will prevent exogenous shock-driven recessions from becoming depressions.
"Stuckflation" remains a theme in this year’s Capital Market Assumptions report, appearing for the fifth 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 recognize the fact that all of the fiscal and monetary stimulus money that has been pumped into economies to combat the dire impact of the pandemic could drive up inflation, we expect this to take years because of such counter inflation forces as supply chain stability as a result of advances in technology, consumer spending hesitancy, and a slow return of jobs," said Northern Trust Chief Investment Strategist for Europe, the Middle East, Africa, and the Asia-Pacific region, Wouter Sturkenboom.
Northern Trust sees no lessening in tensions between the U.S. and China, hence the Capital Market Assumption report’s fourth investment theme, One World, Two Systems. These tensions, which now extend beyond trade into blame for the virus, not only impact the two countries. Other countries and multi-national companies will be forced to pick a side or remain neutral. Regardless of their choice, they, along with the principal combatants, will suffer from lost economic opportunity or economic inefficiencies, and very likely both.
Reimagining Capitalism, our fifth theme, is aligned with the efforts of the US Business Roundtable, a group of CEOs from the world’s most influential corporations, to redefine the purpose of a corporation beyond just serving the interest of shareholders. In its new "Statement on the Purpose of a Corporation," the Roundtable stated, "While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders." With this view becoming global, the report’s theme recognizes that such a shift in purpose may mean less profit for companies across the globe. "But, empirical evidence shows that when you take environmental, social, and governance factors together, you often achieve better risk-adjusted performance over both the long- and short-term with companies that rate higher on these sustainability metrics," said Northern Trust Chief Investment Officer Bob Browne. "We expect that an increasing awareness of this will lead to a more sustainable economic system, as business leaders, the ultra-wealthy, and politicians will find a way to forge a new capitalism that works better for all."
Sustainability is also the core of the report’s final theme, Stay Focused on Climate Change. With COVID-19 tragically showing how severely large, non-financial events can hurt not only investment returns (despite the subsequent recovery), but the overall economy as well, we expect that most countries will act with considerable urgency to mitigate climate change risk. Post-pandemic economic rebuilding will force leaders to confront it. This will be a headwind for some industries and a tailwind for others.
The full report, which outlines the firm’s long-term asset class return expectations and forecasts for the next five years, is available at capitalmarketassumptions.com.
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 realize their long-term objectives. Entrusted with US$1.0 trillion of investor assets as of June 30, 2020, we understand that investing ultimately serves a greater purpose and believe investors should be compensated for the risks they take — in all market environments and any investment strategy. That’s why we combine robust capital markets research, expert portfolio construction and comprehensive risk management to craft innovative and efficient solutions that deliver targeted investment outcomes. As engaged 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 composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, and investment personnel of The Northern Trust Company of Hong Kong Limited, Belvedere Advisors and The Northern Trust Company.
About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 22 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2020, Northern Trust had assets under custody/administration of US $12.1 trillion, and assets under management of US $1.3 trillion. For more than 130 years, Northern Trust has earned distinction as an industry leader for 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 U.S.A., incorporated with limited liability in the U.S. Please read our global and regulatory information.
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