Over the next five years, the global economy is expected to experience a 2.4% real average annualized growth, according to a recent report from Northern Trust.
Although the report, titled “Northern Trust’s Capital Market Assumptions five-year investment outlook,” acknowledges equity valuations are high in developed markets, Northern Trust predicts low inflation and steady economic growth will continue to keep stocks attractive. The report also says the highest regional average annualized return will come from emerging markets at 8.4%; followed by 7.2% for Europe, 6.6% for the UK, 6.0% for Japan, and 5.9% for the US,
The outlooks also expects rates on three-month bonds from the US, Europe, Japan, and the UK to increase to a range of 0.0% (Japan) to 2.1% (US). The 10-year bond expectation ranges from 0.5% (Japan) to 3% (US). In addition, the firm does not foresee a bond bubble, and expects interest rates to remain low with gradual and modest increases while being less than Bloomberg’s reported general market expectations.
The firm identified six investment themes, including “Waiting for the Monetary Godot,” which refers to the belief among investors that monetary policy will normalize as global growth remains depressed and inflation stays below central bank targets —which the firm believes is 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,” Northern Trust’s Chief Investment Officer Bob Browne said in a statement. “A successful unwinding of huge central bank balance sheets, which is likely to remain larger than historical levels, will be the focus.”
In its “Popular Catharsis” theme, the forecast also assured that “populist earthquakes” such as the Brexit and the US presidential election would not derail another of the six themes titled “Entrenched Growth.”
“The rise of global populism has not dramatically changed the global economic outlook,” Northern Trust’s Chief Investment Strategist Jim McDonald said in a statement. “During this political and economic transition, investors will show patience and reward those leaders who drive change.”
The remaining themes in the report are “Stuckflation,” “Regulation in the Limelight,” and a “Valuation Structure.”
According to Wayne Bowers, CIO and CEO for Northern Trust Asset Management in Europe, Middle East and Africa, the report’s overall 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,” he said in a statement. “These factors, along with regulatory relief and persistent low inflation, will continue to allow easy monetary policy, and stop global markets from overheating.”