The global economy will experience 2.4 per cent real average annualised growth over the next five years, according to Northern Trust’s Capital Market Assumptions five-year investment outlook, a report that informs the investment decisions for the USD1 trillion managed by the firm.
While acknowledging that equity valuations are high in developed markets, the forecast projects that steady economic growth along with low inflation will keep stocks attractive since these conditions are conducive to strong earnings and support high valuations. The highest regional average annualised return is forecast for emerging markets, at 8.4 per cent, followed by: 7.2 per cent for Europe; 6.6 per cent for the UK; 6.0 per cent for Japan; and 5.9 per cent for the US .
The outlook does not foresee a bond bubble given the firm’s expectation that interest rates will remain low and increase gradually and modestly, as well as less than general market expectations reported by Bloomberg. Northern Trust expects rates on 3-month bonds from the US, Europe, Japan, and the UK, to increase to a range of 0.0 per cent (Japan) to 2.1 per cent (US). The firm’s 10-year bond expectation ranges from 0.5 per cent (Japan) to 3.0 per cent (US).
The complete forecast is based on six investment themes identified by Northern Trust. One of them, “Waiting for Monetary Godot,” refers to a widely held belief among investors that monetary policy will normalise as global growth remains subdued and inflation stays below central bank targets. However, Northern Trust finds this outcome highly unlikely. “We may never see central banks return to traditional policies and don’t expect a return to pre-financial crisis levels over our forecast horizon,” says Northern Trust Chief Investment Officer Bob Browne. “A successful unwinding of huge central bank balance sheets, which is likely to remain larger than historical levels, will be the focus.”
In citing Brexit and the US presidential election as examples of “populist earthquakes” cited in its “Popular Catharsis” theme, the forecast notes that such events will not derail another of the six themes – “Entrenched Growth” over the next five years. “The rise of global populism has not dramatically changed the global economic outlook,” Northern Trust Chief Investment Strategist Jim McDonald (pictured), says. “During this political and economic transition investors will show patience and reward those leaders who drive change.”
Wayne Bowers, CIO and CEO for Northern Trust Asset Management in Europe, Middle East and Africa says the report’s theme of “Entrenched (Global) Growth” and relative stability “is based on demand being constrained by natural regulators such as high debt burdens, aging developed market populations and transitioning emerging market economies. These factors, along with regulatory relief and persistent low inflation, will continue to allow easy monetary policy, and stop global markets from overheating.”
Northern Trust’s capital market assumptions are the firm’s forward-looking, historically aware forecasts for global economic activity and financial market returns. These forecasts drive its five-year asset class return expectations and asset allocation decisions.
Developed by the firm’s top investment professionals, this framework serves as the foundation for the solutions the firm provides to professional and individual investors worldwide.