We think developed market equities will benefit from an outlook of steady growth and low inflation, which underpins earnings and supports higher valuations.
Our return forecast of 6.4% for developed markets is supported by revenue growth of 4.1% and a dividend yield of 2.3%; our return forecast for emerging market equities is stronger at 8.4%.
Developed Market Equities Total Return Forecast
Emerging Market Equities Total Return Forecast
Developed-market equities find themselves in a sweet spot of modest growth and low inflation, underpinning earnings and allowing valuations to remain elevated. Emerging market equities remain attractive; valuations are too low for the stable economic environment we expect.
Constructive fundamentals and stable valuations should result in mid-to-upper-single digit total return.
Source: Northern Trust Investment Strategy, Bloomberg, MSCI. Components may not exactly equal total return due to compounding. Returns shown reflect Northern Trust CMA forecasts.
Outlook: Fixed Income — No Bubble
Investment-grade bond forecasts are helped by the higher level of yields this year, and returns will be supported by the controlled shift higher in rates over the next five years.
We only expect the U.S. Federal Reserve to get the Fed funds rate to 2.0% at the end of our forecast period and we expect the Bank of Japan to be stuck at a 0.0% policy rate.
We think the slow upward move in U.S. short rates will lead to a 3.0% yield on the 10-year Treasury, as compared with a 0.5% yield on the 10-year Japanese government bond and 1.8% on the German Bund.
Expected Annualized Return For Global Investment Grade
Expected Annualized Return For Global High Yield
Investment-grade forecasts are benefiting from a higher yield starting point and a controlled shift to higher interest rates. Cash returns are still likely to underperform inflation over the next five years. Normalized high yield credit spreads (from last year’s oil price weakness) mean lower returns.
Higher interest rates will occur gradually and have been priced in across most regions.
Source: Northern Trust Investment Strategy, Bloomberg. As of June 30, 2017.
Outlook: Real Assets Dealing With Transitions
We don’t believe natural resource demand is dead, and underinvestment will eventually pressure supply. Our forecast for natural resources is 7.4%.
Developed economy infrastructure needs provide longer-term opportunities as cash-strapped governments look to the private sector for help, keeping our global listed infrastructure total return forecast at 5.8%.
Natural Resources Total Return Forecast
Real Estate Total Return Forecast
Global Listed Infrastructure Total Return Forecast
Factors underpinning real assets have softly faded over the past year. Natural resources have bounced back from an oversold position; global listed real estate and global listed infrastructure have slightly greater competition from slowly rising interest rates. All retain key roles in a multi-asset class portfolio.
Our 4.4% hedge fund return forecast represents the combination of expected alpha (0.6%) and expected returns from risk exposures (3.8%). We still expect private equity to generate a 2.0% premium to public equities.
Hedge Fund Return Forecast
Private Equity Return Forecast
We view hedge funds, in aggregate, as just one large multi-asset class portfolio with notable exposure to market risk. They add value by generating alpha, not returns. Broad industry hedge fund expected alpha ticked up slightly (0.5% to 0.6%). But alpha varies significantly by strategy and manager skill level, making the selection process paramount.
For private equity, our 2.0% illiquidity premium forecast is below the 2.5% long-term average as private equity managers navigate crowded markets.
Hedge funds’ reliance on risk exposures to generate total returns has been increasing.
Hedge Fund vs. Balanced Portfolio — 10-Year Rolling Returns
Hedge Fund Total Return
Balanced Portfolio Total Return
Source: Northern Trust Investment Strategy Bloomberg, Hedge Fund Research. Hedge fund returns represented by the HFRI Fund Weighted Index. Past performance is not indicative of future results. It is not possible to invest in an index.
Balanced Portfolio = 50% Bloomberg BarCap Global Aggregate Index/50% MSCI ACWI
More Asset Class Insights
Get our latest asset class views as shared on our Point of View blog, AssetTV and other media outlets.
The global economic expansion will continue at a modest but steady pace.
Some of the forces contributing to the entrenchment include high debt burdens, aging developed market populations and transitioning emerging economies.
Economic Growth by Expansion Era
Global economic growth after the global financial crisis has settled into a slow-but-steady channel.
Source: Northern Trust Investment Strategy, IMF
The bigger risk to the global economy continues to be too little — not too much — inflation.
We expect that inflation will remain subdued as automation-enabled supply easily meets demographic-hobbled demand. Pockets of sustained inflationary pressures (e.g., health care and education) will be addressed through innovation.
Energy Units* Per $1 Trillion of GDP
Energy efficiency continues to improve.
Efficiency gains over previous decade (annualized)
Source: Northern Trust Investment Strategy, BP Statistical Review, IMF. *One million tons of oil equivalent
Waiting for Monetary Godot
Patience, gradualism and communication are monetary watchwords going forward.
We expect central banks to focus on successfully unwinding their huge balance sheets, likely ending up at a higher value than historical levels.
Total Assets by Central Bank
The major central banks have amassed nearly $14 trillion of assets, holding sizable portions of the market.
Source: Northern Trust Investment Strategy, Bloomberg, central bank reports
Out of a seemingly chaotic environment, areas for economic and political improvement are uncovered.
While the markets prefer policy stability, when change is required, they will reward policies that move toward new solutions.
Economic vs. Political Freedoms
Economic freedom is generally correlated with political freedom – but some exceptions exist.
Source: Northern Trust Investment Strategy, Economist Intelligence Unit, Heritage Foundation
Regulation in the Limelight
Amid political gridlock, regulations are driving the global business and investing environment.
Around the globe, we expect to see both government and nongovernment agents shaping “smart” regulations for the new economy.
Number of Executive Actions in First 100 Days as President
President Trump signed more executive actions in his first 100 days as president since Harry Truman.
Source: Northern Trust Investment Strategy, Office of the Federal Register
Low interest rates and a rising proportion of higher quality companies support greater-than-average valuations.
Significant changes to financial markets’ structure, players and investment vehicles lead us to believe today’s valuations will endure.
MSCI World Composition: 10 Years Ago vs. Today
Larger allocations to higher-valuation sectors suggest prices are not as stretched as they seem.
5-Year Market Outlook: Can Slow & Steady Win the Race?
MarketScape: Prospects for an Inverted Yield Curve
6 Key Themes for the Next 5 Years
CMA Five-Year Outlook: 2017
Building Smart Portfolios
Our forward-looking, historically aware investment approach powers a breadth of capabilities and solutions — spanning a full spectrum of asset class strategies and investment styles — to meet a variety of portfolio needs.
Bringing it all Together
Capital market expertise brought to life in portfolio solutions.
Every year, Northern Trust’s Capital Market Assumptions Working Group develops forward-looking, historically aware forecasts for global economic activity and financial market returns — which drive our five-year asset class
return expectations and inform our asset allocation decisions.
All of this comes together in the form of our long-term strategic asset class allocation suggestions, which are used by institutional and individual investors worldwide.
Director, International Fixed Income
Bob Browne, CFA
Chief Investment Officer
Brad Camden, CFA
Director, Fixed Income Strategy
Michael DeJuan, CIM®, CAIA
Director, Portfolio Strategy
Director, ETF Investment Strategy
Chief Investment Strategist
Director, Portfolio Research
Chief Investment Officer
Dan Personette, CFA
Director, Interest Rate Strategy
Senior Portfolio Manager
Dan Phillips, CFA
Director, Asset Allocation Strategy
Managing Director, Fixed Income
Northern Trust Asset Management
As a leading global asset management firm, our investment expertise, strength and innovation have earned the trust and confidence of the world’s most sophisticated institutional and individual investors.
With $954 billion in total assets under management,1 and a long-standing history of solving complex investment challenges, we believe our strength and stability drive opportunities for our clients.
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1Assets under management as of March 31, 2018. For the Northern Trust Asset Management entities included in the AUM total, please see disclosure at end of this page.
2Unless otherwise noted, rankings are based on total worldwide assets under management of $942.4 billion as of December 31, 2016 by Pensions & Investments magazine’s 2017 Special Report on the Largest Money Managers. 3Asia Asset Management, 2015. 4Institutional Investor, 2013 and 2014. 5U.S. Institutional, tax-exempt assets managed internally. 6Pensions & Investments as of March 31, 2017. 7U.S. Institutional, tax-exempt assets managed internally.
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