Northern Trust: 'Slow Growth Angst' To Drive 5-Year Returns

Aug 16 2016 | 12:56am ET

New research from global asset manager Northern Trust shows the firm expects most investments to generate single-digit positive returns over the next five years, predominantly due to slow economic growth and persistent low interest rates.

Described in the research as “slow growth angst”, the concern is one of six key themes profiled in the company’s  annual five year market outlook. It is a key driver behind the company’s return forecasts for global investors, which include 5.8% for global equities and 2.1% for investment-grade bond, Northern Trust said in a statement. 

“While we expect markets may be volatile at times, we remain convinced the global economy is in a narrow and slow growth channel,” said Northern Trust CIO Jim McDonald. “Current regulatory and fiscal policies have greatly restricted the boom-bust cycles and, although the risk of a recession increases, if one does materialize it should be shallow due to a lack of economic excesses and financial system stability.”

Despite these subdued, yet positive, projections, Northern Trust believes the three-month German Bunds and Japanese Government Bonds will turn in negative returns during the next five years.

“Developed economies overall will continue their slow pace, expecting annual real economic growth of 1.4 percent over the next five years, and the outlook for emerging economies remains similarly subdued,” said Wayne Bowers, CIO for Northern Trust Asset Management in Europe, Middle East and Africa and Asia-Pacific. “Ultimately, while concerns over slow growth are further impeding global growth, investors need to resist becoming bearish during market weakness or bullish when the economy appears strong and instead scrutinize any future dramatic swings – positive or negative.”

In addition to the theme of “slow growth angst,” Northern Trust has identified five more themes expected to shape the global markets over the next five years:

  • Stuckflation – with supply easily matching slow-growing demand, inflation remains “stuck”
  • Market cycles in a cycle-less economy – current regulatory and fiscal policies have significantly reduced the odds of a boom-bust cycle
  • Technological turbulence – populist-influenced politicians’ view of technology will create a bumpy path for adoption
  • Costs of ultra-low rates – the costs of ultra-low rates may now outweigh the benefits, but central bankers may have no choice except to continue
  • Populist roulette – the rise of populism in response to voter dissatisfaction leaves markets unsure of what to expect from the political arena

Northern said these themes, combined with a historical analysis of financial market return drivers and asset class relationships, form the basis for the firm’s asset allocation recommendations. Conclusions and five-year return forecasts include:

Fixed income: Cash returns are expected to be low to negative as monetary accommodation is extended. A low-yield starting point hobbles fixed income returns, but continuation of the current environment lends support to prices. Some pressures on fundamentals can be offset by demand for yield, supporting credit.

Equities: Developed-market equity returns should be modest due to slow global growth, but low inflation and low interest rates will support profit margins and ease valuation contraction. A better emerging marketing revenue outlook is slightly offset by earnings dilution.

Real Assets: Natural resource returns benefit from a supply response to lower prices. Global real estate will face demand challenges, but returns will be supported by a diversified set of risk exposures. Global listed infrastructure expected to remain a highly valued “bond market proxy.”

Alternatives: While varying by strategy, the return of the “average” hedge fund will be hurt by lower risk exposure returns and lower alpha, magnifying the importance of manager selection. Private equity should see a slight moderation in its illiquidity premium as asset class interest grows.

The report also includes detailed return forecasts organized by asset class and region, and identifies specific risks combined with other portfolio construction tools to annually review and update recommended strategic asset allocations.

Headquartered in Chicago, Northern Trust Asset Management is the global asset management unit of financial services giant Northern Trust Corporation. The company serves institutional and individual investors in 29 countries, with $906 billion in assets under management as of June 30, 2016 across proprietary and multi-manager solutions in all markets and asset classes. 

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