Northern Trust’s 5-Year Forecast Sees Global Private Equity Leading 5-Year Annualized Returns; Global High Yield and U.K. Equities to Lead Among Bonds and Stocks
Backdrop of Slower Growth Expected
Rooted in Northern Trust’s deep capital market analysis, the CMA Report informs the investment decisions and asset allocation recommendations made by the firm, which, as of
Slow Growth Transitions:
Newly affecting the global economy are the slow transitions, including pandemic to endemic; globalization to regionalization; and fossil fuels to renewables. They represent economic challenges for a global economy already facing debt and demographic headwinds. Those transitions will likely lead to continued slow growth.
“In our view, investors will see the past two years’ stimulus-boosted growth reverting to the previous slow form,” said
Chris Shipley, Northern Trust Asset Management’s chief investment strategistfor North America. “Our 1.9% U.S.forecast marks a slowdown from the past five years but is still ahead of most other advanced economies. On top of that, our 3.7% Chinaforecast also marks a slowdown from the past five years.”
Automation and digitization are still impactful disinflationary forces, but can take time to overcome the recent shocks of stressed global supply chains, tight commodity markets and depressed labor supply. Recalibration will likely take much of the five-year horizon.
“While we expect inflation to take time to move back toward central banks’ targets, we do believe the worst has passed,” said
Wouter Sturkenboom, Northern Trust Asset Management’s chief investment strategist for Europe, the Middle East, Africa, and the Asia-Pacific region. “The ‘Stuckflation’ regime is over, replaced by a period of recalibration back toward target levels which, for the U.S.and Europestands at 3% and 2.6%, respectively.”
- Monetary Drought : The firm predicts the post-Global Financial Crisis monetary flood has evaporated — and the next five years may bring much drier conditions. The past couple years of quasi-modern monetary theory policy — partially responsible for high inflation — will unlikely repeat soon.
- Regional Rebuilding Blocs: Globalization is evolving into regional systems driven by security needs — both economic and military. While this economic deglobalization may move slowly, we think decisions on whether — or how best — to deglobalize portfolios will come more quickly.
- Green Transition Still a Go: The rising costs and insecurity of energy supplies have led policymakers to prioritize meeting energy demand in the near term even if it means increasing carbon emissions. But, over the medium term, climate initiatives remain an important consideration.
Not So Negative:
Higher interest rates – including a move out of negative territory for
Europeand Japan– bring investors closer to positive real (after inflation) cash returns. Good for economic functioning (and savers), but a headwind for risk asset valuations.
“We believe that in the next five years investors can expect financial market returns to be modestly below long-term historical averages – per our ‘Slow Growth Transitions’ theme,” said
Developed markets equity returns are forecasted to range from 6.0% (
The CMA Report notes that with ‘Stuckflation,’ a theme the previous five years, moving to ‘Inflation Recalibration’ and inflation expectations more aligned with current market pricing, inflation-linked bond returns are expected to closely mirror
Within fixed income, CMA’s highest expected return is 7.5% for global high yield, for which better index quality, solid interest coverage ratios and reduced issuance are viewed as beneficial.
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
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Source: Northern Trust Asset Management