CHICAGO--(BUSINESS WIRE)--Structurally low global growth will persist over the next five years, weighing down financial markets even as central bank monetary policies continue to support valuations of risk assets, according to Northern Trust’s annual long-term forecast for the economy and capital markets.
Economic growth is forecast at 2.6 percent per year globally and just 1.7 percent per year in developed market economies, constrained by aggregate debt levels, aging populations and the slow pace of consumer demand from emerging markets. Meanwhile, low inflation will allow central banks to continue easy money policies that have aided a cyclical upswing in equity prices, the report says.
“The Slow Burn of Low Growth,” “Low and Slow Monetary Policy” and “Cyclical Meets Structural” are key themes identified in Northern Trust’s 5-Year Capital Market Assumptions: 2015 Edition, released today. The themes summarizing Northern Trust’s long-term outlook, along with detailed return forecasts organized by asset class and region, form the basis of asset allocation recommendations for institutional and Wealth Management clients.
“Each year, we provide a macro overview of the factors likely to shape the economic and financial market landscape in the years ahead,” said Northern Trust Chief Investment Strategist Jim McDonald. “With events moving quickly in Greece, China and elsewhere, our report presents an opportunity to step back and look at the forces driving markets and how asset classes and regions are likely to fare over a longer period.”
In the slow-growth environment, Northern Trust forecasts five-year annualized returns of 5.6 percent for U.S. equities, compared to the 17.5 percent actual annual gains for the five years ending June 30, 2015. Similarly, global equities are forecast to gain 6.5 percent annually over the next five years, compared to 13.5 percent actual annualized returns for the past five years. Emerging market equities are forecast to return 7.8 percent annually, slightly above the 7.3 percent annualized returns for the past five years.
Conclusions and five-year return forecasts for other asset classes in the report include:
- Fixed Income: U.S. and UK cash will generate annualized returns of 1.5 percent, while U.S. investment-grade will return 3 percent and global high yield 5.8 percent annually. Cash returns have risen slightly with the U.S. Federal Reserve and Bank of England expected to “lift off” a zero interest rate policies, but only slowly increase rates over the next five years. High yield has solid fundamentals and an energy sector related selloff has provided an opportunity.
- Real Assets: Global listed real estate will deliver annualized returns of 6.9 percent and global listed infrastructure 6.2 percent. Both asset classes benefit from their diversified risk exposures, including sensitivity to interest rates, which are expected to remain low. Natural resource/commodity return forecasts continue to face the headwinds of low global demand and transitioning emerging economies, but recent price declines have adjusted to the new environment.
- Alternatives: Private equity (a 75/25 mix of buyout and venture capital) will return approximately 8.6 percent annually, as PE continues to command an illiquidity premium over public equities. Purchase prices have increased in aggregate, but financing costs will remain low and opportunities for increased efficiencies remain high. Hedge funds can benefit from non-traditional beta and alpha (in the form of manager skill), but manager selection is essential given the wide dispersion of strategy returns.
Detailed return forecasts organized by asset class and region are developed by Northern Trust’s Capital Market Assumptions Working Group, composed of senior investment professionals from across the global organization. The group combines empirical research with a forward-looking, historically aware analytical approach. Northern Trust also identifies specific risks that are combined with other portfolio construction tools to annually review and update recommended strategic asset allocations.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, 50 South Capital Advisors, LLC Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited 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 offices in the United States in 19 states and Washington, D.C., and 20 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2015, Northern Trust had assets under custody of US$6.2 trillion, and assets under management of US$946 billion. For 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 http://www.northerntrust.com/disclosures.