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.
