Northern Trust’s 5-Year Forecast Sees Economic Conditions Generating Global Stock Returns in 5.5% - 8.8% Range
September 17 2018 - 11:00AM
Business Wire
Growth Cycle to Continue, Inflation and Rates
to Remain Low
The global economy will experience 2.5 percent 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,
www.capitalmarketassumptions.com. The firm predicts that, interest
rates will remain low and below investor expectations, with
inflation continuing to be held in check by the same structural
forces, including technology, that have kept it muted for
years.
The report foresees “good-but-not-great” returns from equities
and low-but-mostly-positive fixed-income returns. The highest
average annualized equity return is forecast for Asian emerging
markets at 8.8%, with overall emerging markets at 8.3%. The U.K.
and Europe are at 6.3%, and Japan is at 6.0%. The U.S. is at 5.8%
and Canada is lowest at 5.5%. On a global basis, Northern Trust’s
equity forecast is higher than current stock valuations suggest.
Its expectation for modest fixed-income returns across the globe is
based on interest rates remaining low with a small difference
between short-term and long-term rates.
The Capital Markets Assumptions report, featuring long-term
asset class return expectations and forecasts, is produced annually
and informs the investment decisions and asset allocation
recommendations made by Northern Trust, which has $1.1 trillion in
assets under management.
Investment Themes
The asset class forecasts are informed by six themes identified
by Northern Trust that are driving markets. The report points to
aging populations, transitioning emerging economies and elevated
debt levels as causes behind the global economy’s slow growth
trajectory, and notes that many investors see a recession soon
approaching. “We see that some investors, concerned about that the
length and pace of the current growth cycle, are increasingly
focused on a potential recession – but we feel they may be
suffering from a case of Mild Growth Myopia, Northern Trust Chief
Investment Strategist Jim McDonald said. “The same forces
that have been keeping a lid on growth have helped to both buffer
downturns and extend the cycle itself.”
Rooted in the firm’s deep capital market analysis, the forecast
includes Northern Trust’s expectation that interest rates will
remain below what many investors are anticipating. Stuckflation is
the investment theme that they see largely responsible for low
rates.
“Over the course of this nearly 10-year expansion period, we’ve
seen investors respond to persistently low and durable structural
inflation by altering their investment behaviors,” Northern Trust
Chief Investment Officer Bob Browne said. “Add to this mix the fact
that most central banks fell well short of their two percent annual
targets over the past decade, and we don’t see an immediate change
on the horizon.” The report states that monetary policy adjustments
and trade frictions will produce uncertainties and pockets of
inflation, but that companies and consumers will continue to find
ways to alleviate such pricing pressures.
Pass/Fail Monetarism is a third investment theme the firm
believes investors must watch in the years ahead. Central banks are
operating in an environment that differs from historic norms, when
aggressive or active policy making was expected in reaction to
financial market conditions. Now, with stricter financial market
regulations in place, central banks should act more cautiously than
in the past.
“We believe central banks are really in uncharted territory.
Without a clear map for policy normalization, it’s not possible to
grade the efforts of central banks. But, let’s be clear: in order
to pass, they simply must not fail,” said Browne. “To stay out of
the spotlight, central banks should – and will – pay less attention
to any potential pockets of cyclical inflation and more attention
to avoiding a premature end to this lackluster economic expansion.
A premature end could result if central banks raise rates in order
to be prepared for the next downturn.”
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
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 offices in the
United States in 19 states and Washington, D.C., and 23
international locations in Canada, Europe, the Middle East and the
Asia-Pacific region. As of June 30, 2018, Northern Trust had assets
under custody/administration of US$10.7 trillion, and assets under
management of US$1.1 trillion. For more than 125 years, Northern
Trust has earned distinction as an industry leader for exceptional
service, financial expertise, integrity and innovation. Visit
northerntrust.com or follow us on Twitter @NorthernTrust.
Northern Trust Corporation, Head Office: 50 South La Salle
Street, Chicago, Illinois 60603 U.S.A., incorporated with limited
liability in the U.S. Global legal and regulatory information can
be found at https://www.northerntrust.com/disclosures.
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Northern Trust CorporationUS & Canada Contact:Tom Pinto+1
212 339 7288Tom_Pinto@ntrs.comorEurope, Middle East, Africa &
Asia-Pacific Contacts:Camilla Greene+44 (0) 207 982
2176Camilla_Greene@ntrs.comorMat Barling+44 (0) 207 982
1445Mat_Barling@ntrs.comhttp://www.northerntrust.com
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