Capital Market Assumptions
2018 Edition

Five-Year Outlook

Long-term asset class return expectations and forecasts for the years ahead.
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What should investors expect in 2019?
Asset Class Forecasts And Return Expectations
Modest growth, benign inflation and slowly increasing interest rates provide a constructive backdrop.
Outlook: Profits Prop Up Equities
We think global equity returns will remain below long-term historical averages, but will be higher than current valuations – which we expect to remain higher than normal – might suggest.

Our return forecast of 6.0% for developed markets is driven by our expectation for 4.2% revenue growth and a 2.4% dividend yield; our return forecast for emerging market equities is 8.3%.
Outlook Rationale
Developed market equities continue to benefit from ongoing – albeit mild – growth and low inflation. And valuations have retreated as earnings have moved higher. Emerging market equities remain attractive; we expect them to continue to benefit from higher growth and below-historical-level valuations.
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Developed Market Equities Total Return Forecast
Emerging Market Equities Total Return Forecast
Building Blocks to Total Returns
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 — Interest Rates Stay Low
Mild growth and Stuckflation will keep interest rates low and yield curves flat globally.

We think interest rates will remain below investor expectations, driven by Stuckflation and accommodative central banks, leading to our 2.8% interest rate forecast for 10-year U.S. Treasury bonds, compared to 0.3% for 10-year Japanese government bonds and 1.0% for 10-year German bunds.

We expect a 4.6% global high yield annual return, as the stable economic outlook keeps a lid on default rates.
Outlook Rationale
Globally, inflation remains below central bank targets, and we expect that to continue.

To avoid inverting the yield curve, we believe the U.S. Federal Reserve will end its rate hike cycle – earlier and at a lower level than the markets expect.

We expect defaults in high yield to remain contained; a stable global economy will help emerging market debt, while U.S. municipals will benefit from overall credit stability.
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Expected Interest Rate Forecast For 10-Year U.S. Treasury Bonds
Expected Annualized Return For Global High Yield
A Gradual Shift Higher
Higher interest rates will occur gradually and have been priced in across most regions.
Source: Northern Trust Investment Strategy, Bloomberg. As of June 30, 2018.
Outlook: Real Assets Will Perform In Line With Equities
We believe an equity-based approach to real assets will continue to offer investors strong results while providing diversification to portfolios.

We expect natural resources to continue to outperform equities, leading to our total return forecast of 7.2%. Our 6.0% forecast for global real estate acknowledges the positive support it will receive from its exposure to interest-rate and credit risk. And the public-to-private transfer of infrastructure projects has created new opportunities for investors, supporting a 5.4% total return.
Outlook Rationale
Ongoing global economic growth and better calibration between supply and demand will continue to fuel the outperformance of natural resources relative to global equities.

Global real estate should benefit from its exposure to both credit and interest-rate risk, but negative investor sentiment remains a headwind as the sector struggles to adapt to a digitally based economy.

Global listed infrastructure benefits as cash-strapped governments turn to the private sector to help meet their infrastructure needs.
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Natural Resources Total Return Forecast
Global Real Estate Total Return Forecast
Global Listed Infrastructure Total Return Forecast
Real Returns
Natural resources and listed infrastructure do a better job of outpacing high inflation.
Source: Northern Trust Investment Strategy, Bloomberg.
Emerging Markets = MSCI Emerging Markets Index
Outlook: Alternative Continue To Add Value
We expect private equity to generate a 2.0% premium over equities, as companies stay private longer, generating more opportunities and offsetting increased investor interest. This will give private equity a total return of 8.0%.

Our 4.3% hedge fund return forecast reflects shrinking alpha and lower expected returns from risk exposures.
Outlook Rationale
New opportunities in private equities, brought about by companies staying private longer, are offsetting slightly higher valuations and increased investor interest. Our hedge fund return expectation recognizes lower average alpha (0.4%) and lower expected risk exposures (3.9%), based on our risk factor model. But we recognize the dispersion across individual strategies. Manager selection is paramount.
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Private Equity Return Forecast
Hedge Fund Return Forecast
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 blogsite, Asset TV and other media outlets.
6 Key Themes
Here are the key themes we believe will shape the investment landscape in the next five years.
Mild Growth Myopia

Subdued economic cycles and stronger financial systems will push out the next recession and limit its severity.

We expect the slow growth trajectory to continue course, as the forces keeping a lid on growth have also extended the U.S. expansion cycle. Despite the increased odds of recession, we believe its onset will be later – and less threatening – than many expect.

Current U.S. Expansion Not Record Magnitude
Even with five more years of growth, total output will still be shy of expansions of the ’80s and ’90s.
Graph: Current U.S. Expansion Not Record Magnitude
Graph: Current U.S. Expansion Not Record Magnitude
Source: Northern Trust Global Asset Allocation, Bloomberg.

Low and durable structural inflation has altered both monetary policymaking and investor behaviors.

We expect that inflation will remain subdued because structural forces have turned the 2% inflation target into a ceiling over the past 10 years. Further, we expect that monetary policy adjustments and trade friction will produce pockets of inflation, but companies and consumers will be able to alleviate the pressure.

Cumulative inflation shortfalls over the past decade are biggest in the three major economies.
Graph: Underachievers
Graph: Underachievers
Source: Northern Trust Global Asset Allocation, Bloomberg. Green bars represent the core inflation measures. Data from 6/30/2008 to 6/30/2018.
Pass/Fail Monetarism

Without a template for policy normalization, central banks’ efforts cannot be graded – but they must not fail.

We’re in new monetary policymaking territory where only two grades exist: Pass or Fail. Monetary experts know financial instability – not high inflation – ended recent business cycles. This time around, we think they’ll take a more cautious path.

Lower Lows, Lower Highs
Fed policy has moved closer to the zero-bound over the past 25-plus years.
Graph: Lower Lows, Lower Highs
Graph: Lower Lows, Lower Highs
Source: Northern Trust Global Asset Allocation, Bloomberg. Data from 12/31/2008 to 6/30/2018.
Technology Slowzone

Technology has been pulled into the orbit of government oversight, but will remain a constructive force.

Technology finds itself in the political cross-hairs, as its data collection endeavors – especially those for political purposes – have sparked deep angst. But we believe technology’s benefits are too great to be throttled for long.

Airbnb has proven itself a viable – and cheaper – alternative to traditional hotels.
Source: Northern Trust Global Asset Allocation, Kleiner Perkins 2018 Internet Trends. AirDNA, HRS, Statista. Prices as of January 2018.
Global (Re)Positioning System

The irreversible fade of legacy multi-lateral institutions is creating as many investment opportunities as risks.

We expect global engagement to continue, but it will be based on transactions-oriented, not ideological, frameworks. The tug of war between free markets and managed capitalism will be resolved somewhere in the middle.

Globally Integrated Economies
Over the past 25 years, global trade has risen dramatically.
Graph: Globally Integrated Economies
Graph: Globally Integrated Economies
Source: Northern Trust Global Asset Allocation, World Bank. Yearly data from 12/31/1960 to12/31/2016. Northern Trust estimates as of 2017.
Executive Power Drive

Investors are accepting leaders who challenge political norms in order to favorably tilt the economic landscape.

Tech-enabled populists are pushing leaders with strong views and new agendas onto the political stage. All sides agree that control of executive power and technology are the key to shaping the future economic landscape. We expect investors will stay supportive until populism runs its course.

Hard to Please
Amid low approval ratings for politicians globally, populist leaders have found their niche.
Graph: Hard to Please
Graph: Hard to Please
Source: Northern Trust Global Asset Allocation,, Opinium, ARD-DeutschlandTrend, Ifop, Nikkei, Ipsos, Median, MetroPoll (May 2018), VTsIOM, The Australian (May 2018). Poll data as of June 2018 unless noted otherwise. *Denotes approval of leader’s political party.
More on Our Themes
We analyze the trends and themes driving economic and market activity over the next five years.


Mixed messages from the Fed


6 Themes for the Next 5 Years


What Investors Can Expect in the Years to Come

CMA Five-Year Outlook | 2018

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Find out what investors should expect in the years ahead.
Download Executive Summary
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.
Bob Browne, CFA
Northern Trust
Chief Investment Officer
Brad Camden, CFA
Asset Management
Director, Fixed Income Strategy
Michael DeJuan, CIM®, CAIA
Asset Management
Director, Portfolio Strategy
Peter Flood
Asset Management
Director, ETF Investment Strategy
Jim McDonald
Northern Trust
Chief Investment Strategist
Peter Mladina
Wealth Management
Director, Portfolio Research
Katie Nixon
Wealth Management
Chief Investment Officer
Dan Personette, CFA
Asset Management
Director, Interest Rate Strategy
Brad Peterson
Wealth Management
Senior Portfolio Manager
Dan Phillips, CFA
Northern Trust
Director, Asset Allocation Strategy
Colin Robertson
Asset Management
Managing Director, Fixed Income
Chris Shipley
Asset Management
Director, Fundamental Active
Carl Tannenbaum
Northern Trust
Chief Economist
Northern Trust Asset Management

Northern Trust Asset Management is a global investment manager that helps investors navigate changing market environments, so they can confidently realize their long-term objectives.

Entrusted with more than $900 billion of assets, we understand that investing ultimately serves a greater purpose and believe investors should be compensated for the risks they take — in all market environments and any investment strategy.

$956 Billion in AUM1

That’s why we combine robust capital markets research, expert portfolio construction and comprehensive risk management to craft innovative and efficient solutions that deliver targeted investment outcomes.

As engaged contributors to our communities, we consider it a great privilege to serve our investors and our communities with integrity, respect, and transparency.

1Assets under management as of March 31, 2019. For the Northern Trust Asset Management entities included in the AUM total, please see disclosure at end of this page.

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