In today's constantly recalibrated world, a five-year investment horizon might seem too long a view. But not to Northern Trust's Executive Vice President and Chief Investment Strategist Jim McDonald, who delved deeper into the bank's recently released five-year forecast, noting that although these findings will be more targeted this year and next, the big picture provides investing context, especially post-pandemic.
Northern Trust, which holds $15.7 trillion in custody/administration and $1.5 trillion in assets under management, updates its outlook annually. This one covers some ground visited by last year's report, although it notes that the post-pandemic global economy will take a different shape, largely due to the virus' lingering effects.
For example, interest rates will remain low, central banks will remain accommodative, inflation will be 2% or less, technology continues to expand its footprint and the climate change impact and sustainable investing appetite will continue to grow.
Investment wise, equities continue to be where to invest, but they won't see the double-digit returns we've seen in last five years, the bank states in its report. However, long-term credit, real estate, natural resources and private equity will be healthy return diversifiers.
But hurdles are on the horizon, such as a global graying workforce, China/West confrontations, especially when it comes to natural resources, and how the slowing growth of global population has impacts on several factors.
Here are 10 areas McDonald highlighted in his conversation with ThinkAdvisor:
1. A return to mediocrity.
Don't expect double-digit investment returns going forward, he says. Although economies are recovering from the pandemic, "we have some significant long-term constraints on growth."
The bank projects annualized real growth of 2.9%, with the United States at 2.1%, Europe at 2%, Australia at 2.4% and China at 4% growth over the next five years. This slowed growth is due to several constraints, McDonald says.
"First, population growth is slowing worldwide and the change in the working-age population alongside productivity are two big drivers for growth," he explained. "Secondly, all of the debt that's been issued in response to the pandemic is going to slow future growth."
U.S. equities should end 2021 up around 4.7%, but going forward, it will be closer to 4.3% annualized over five years. Global equity markets will be around 4.6% annualized over a five-year period, although the United Kingdom is forecasted at 6.2% "as it finds its post-Brexit bearings," the report notes.
The bank doesn't point out the pandemic separately, but as McDonald said, "we debated [that], but decided that it actually impacts many different parts of the forecast. … On the inflation outlook, it is raising prices short-term, but the increased implementation of technology during the pandemic will be disinflationary long term."
2. A hybrid work approach is a competitive edge.
"Companies will end up continuing with hybrid work models because their employees are demanding it, and we're now in an environment where employees have the upper hand," he says. Many companies are in a hybrid mode, he adds, because they believe the flexibility "is a competitive advantage."
3. Reduction of global workforces impacts growth.
The global graying of the workforce means it is shrinking. Australia's healthier growth is largely due to its increasing population, where U.S. population growth projected over the next five years is 0.6% while Europe and China will be at 0.2%.
"And changes in population growth numbers happen extremely slowly," he says. "So China making changes to its one-child policy is unlikely to measurably change the overall ratios, especially when it takes at least 18 years to get [people] into the workforce."
In fact, "the only real variable is immigration, and that's an area that the U.S. has underperformed prior growth because of increased focus on limiting immigration over the last several years," he said. "In [this] political climate it [isn't] being embraced, even though it would be a positive to the economy."
4. Central banks will remain accommodative.
No longer the simple lenders of last resort, central banks now "work in unison with fiscal policy, funding the latter's stimulus and keeping borrowing costs low."
