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Portfolio > Economy & Markets > Economic Trends

6 Economic Predictions for the Next 5 Years: Northern Trust

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Global financial market returns over the next five years should modestly trail historical averages, with slower growth and high interest rates hampering equities while bonds likely outpace previous performance, Northern Trust Asset Management recently predicted in its Capital Markets Assumptions Report.

The firm also noted that what it called the “Stuckflation” regime, defined as prolonged subdued inflation, is over, moving to inflation recalibration.

Northern Trust Asset Management, which has $1 trillion in assets under management, bases its forecasts on six key economic assumptions. While the economic forces contributing to market volatility today play a role in those assumptions, Northern Trust applies them to the longer view.

“The nice thing about this process is that you can really try to step back from the near-term issues that are going on,” Chris Shipley, Northern Trust Asset Management’s chief investment strategist for North America, told ThinkAdvisor last week. “It is nice to be able to pick your head up and look out on the horizon.”

The firm’s six themes for its new five-year outlook are:

1. Slow Growth Transitions

Slow transitions, ”from pandemic to endemic, globalization to regionalization and fossil fuels to renewables,” will likely lead to continued slow growth, the firm predicted. Investors will navigate a challenging global economy with high debt and unfavorable demographics, Northern Trust said.

The firm expects 2.6% annualized real global economic growth in the next five years, including 1.9% in the U.S.

“In our view, investors will see the past two years’ stimulus-boosted growth reverting to the previous slow form,” Shipley said in a statement when Northern Trust released its forecast.

“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% China forecast also marks a slowdown from the past five years,” he said.

2. Inflation Recalibration

While automation and digitization produce strong disinflationary forces, they will likely need time to overcome the inflationary supply shocks generated by the pandemic and the Ukraine war, as well as the depressed labor supply, Northern Trust predicted.

“Everything starts with inflation and you back into the rest,” Shipley said, adding that in the U.S., the firm expects inflation to run higher than the Federal Reserve Bank’s 2% target.

Shipley expects stressed supply chains to persist, commodities to stay relatively expensive and the labor supply to be challenged over the next several years relative to recent experience.

“There’s a greater appreciation on the part of labor for their ability to have a seat at the table and that they have a little more pricing power than they did previously,” he said.

Wouter Sturkenboom, Northern Trust Asset Management’s chief investment strategist for Europe, the Middle East, Africa and the Asia-Pacific region, said in a statement that while the firm expects inflation to take time to move back toward central banks’ targets, “we do believe the worst has passed.”

“The ‘stuckflation’ regime is over, replaced by a period of recalibration back toward target levels, which, for the U.S. and Europe stands at 3% and 2.6% (annualized inflation,) respectively,” Sturkenboom said.

3. Monetary Drought

The post-financial crisis “monetary flood,” marked by exceedingly low interest rates, has stopped and much drier financial conditions may dominate in the next five years, according to Northern Trust. Investors will have to adjust for higher interest rates and no longer should count on central banks to rescue the economy.

With new inflation forecasts, the period of “ultra-accommodative” central bank policy is over, Shipley said.

A higher-interest-rate period has implications for investors as well as the economy, he noted. It affects the price-to-earnings ratio investors are willing to pay for stocks, and higher rates mean equities aren’t the only game in town, with fixed income becoming a more viable asset class for positive returns.

4. Regional Building Blocs

Companies are working to bolster their economic and military security by reducing dependence on energy and technology imports, especially from adversary nations. Investors will decide whether or how best to “deglobalize” their portfolios accordingly, the firm said.

Companies may be reluctant to make significant, long-term investments in China, for example, if it will become a strategic problem, Shipley said. So companies and investors may start to position themselves for a potential Chinese conflict in Taiwan, he added.

5. Green Transition Still a Go

The transition to renewable energy may be delayed by Russia’s energy battle with Europe, which has spurred a search for other supplies. High fossil fuel prices and the focus on national energy security, however, creates potential investment opportunities for green energy, according to the firm.

6. Not So Negative

Higher interest rates “bring investors closer to positive real after-inflation cash returns,” Northern Trust said, citing also a move from negative interest rates in Europe and Japan. “This is good for economic functioning and savers but a risk for other investment returns.”

Assets Forecast

The firm’s forecast for below-average equity returns in the next five years and above-average cash “does narrow that gap (and) has implications for how to think about asset classes in a diversified portfolio,” Shipley said.

The firm projects 6.1% annualized global equities returns over the next five years compared with 8.3% in the previous five years.

The forecast includes 6.2% annualized equities growth in developed markets in the next five years compared with 8.8% in the previous five.

Emerging market equities, in contrast, should see slightly higher returns than in the previous five years: 5.8% annualized over the next five years versus 4.7% in the previous half decade, potentially benefiting from higher revenue.

Northern Trust forecasts 6% annualized returns for U.S. stocks over the next five years compared with more than 11% annualized for June 2017 through June 2022.

The firm sees modest fixed income performance compared with long-term standards, with higher yields nonetheless helping bonds rebound from historically high losses. Flat global yield curves, however, will probably mean dependence on coupon payments rather than price appreciation, the firm said.

Among U.S. fixed income securities, Northern Trust forecasts 3.7% annualized returns for investment-grade bonds, 7.4% returns for high-yield bonds and 3.2% for municipal debt, all higher than returns in the previous five years.

Meanwhile, inflation-sensitive real assets play an increasingly important role in diversified portfolios, the firm said. While all real assets should perform well over the next five years, natural resources are particularly attractive because of surging commodity prices, according to Northern Trust.


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