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Asset Class Forecasts And Return Expectations
From the bond markets to equities, real assets and alternatives, get our asset class forecasts and return expectations to help guide your asset allocation decisions.
We have lowered our five-year annualized global equity return forecast to 4.9%. This 0.9% reduction is driven by our U.S. forecast, in which we believe U.S. market valuations are elevated beyond what should be expected, even in the current low-rate environment.

Developed market returns should range from 3.8% (Japan) to 5.8% (Australia) – all below historical averages and the 6.2% forecasted by our quantitative model.

Our expectation of 5.4% for emerging market equity returns, driven primarily by China and Asia, is a mere 0.6% return premium to developed markets.
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Global Equities Total Return Forecast
Developed Market Equities Total Return Forecast
Emerging Market Equities Total Return Forecast
Modest revenue growth and pressured margins will lead to mid-single-digit returns.
Northern Trust 5-Year Annualized Equity Return Forecast by Country (%)
Graph: Equity Building Blocks: Regional Detail
Graph: Equity Building Blocks: Regional Detail
Source: Northern Trust Asset Management.
Slower growth and central bank desire for (but not a realization of) higher inflation will keep short-end rates at zero or below. As short-end rates stay low and inflationary problems do not materialize, we expect longer-end rates to fall short of five-year market expectations.

High yield stands out as an alternative to global equities with its higher yields, higher expected total returns and lower risk profile. We expect a 5.6% global high yield annual return as lower interest rates drive the ongoing search for yield and support asset class fundamentals.
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Expected Interest Rate For 10-Year U.S. Treasury Bonds
Expected Annualized Return For Global High Yield
Fixed-income returns will struggle to remain above inflation, but should stay positive.
Northern Trust 5-Year Annualized Investment-Grade Fixed Income Return Forecast by Country (%)
Graph: Fixed Income Return Building Blocks
Fixed Income Return Building Blocks
Source: Northern Trust Asset Management, Bloomberg. Coupon return calculated as yield-to-worst on 6/30/2020.
Our forecast for natural resources saw a material reduction of 1.5%, resulting in a 3.6% annual return forecast. This is driven by our outlook for slow growth and the extra scrutiny of the environmental impact of natural resource companies.

Our 6.3% forecast for global real estate reflects a 2% qualitative reduction. While term and credit risk exposures should be supportive, they will likely be offset by permanent impairment of many property types, notably retail and office spaces.

In contrast, global listed infrastructure’s term exposure, yields and historical downside protection should make it attractive in our expected economic and market environment, keeping our forecast steady at 5.8%.
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Natural Resources Total Return Forecast
Global Real Estate Total Return Forecast
Global Listed Infrastructure Total Return Forecast
The "average" hedge fund has underperformed a simple 50/50 portfolio in recent times due to declining alpha.
Real Asset Factor Exposure (Beta)
Source: Northern Trust Asset Management, Bloomberg. Regressions calculating factor exposure (beta) run from 12/31/2002 to 3/31/2020. The term factor exposure is the return premium associated with taking on maturity risk; that is, of investing in longer term bonds.
Outlook: Manager Selection Paramount
We expect private equity to generate a 3.0% premium over global equities, bringing our forecast to 7.9%. This represents an impressive alpha/illiquidity premium even after correcting for the lagged appraisals of private equity assets.

Hedge fund beta has been fairly steady over the past 10 years, but the alpha contribution of the asset class has been in notable decline. Our 2.6% hedge fund return forecast represents the combination of expected alpha (0.4%) and expected returns from risk exposure (2.2%).

Given the wide range of strategies and resulting performance dispersion, a focus on manager selection is extremely important -- and can make the difference between buying expensive beta and gaining true alpha.
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Private Equity Return Forecast
Hedge Fund Return Forecast
The “average” hedge fund has underperformed a simple 50/50 portfolio in recent times due to declining alpha.
Hedge Fund versus Balanced Portfolio — 10-Year Rolling Returns
Hedge fund alpha contribution
Hedge fund total return
Hedge fund risk contribution
Balanced portfolio total return
Source: Northern Trust Asset Management, Bloomberg. Data from 12/31/1990 to 3/31/2020. Balanced portfolio is 50% MSCI ACWI / 50% Bloomberg Barclays Global Aggregate Index. A 50/50 portfolio was chosen because it has a similar risk profile to the HFRI Index (hedge funds). Past performance does not guarantee future results.
6 Key Themes
Our Capital Market Assumptions five-year market outlook provides insight into the forces shaping the investing landscape for the coming years. Here are the six key themes driving our tactical outlook and asset allocation for the next five years.

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.
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Find out what investors should expect in the years ahead.
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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, CFA, CIMA, CPWA
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 Equities
Wouter Sturkenboom
Asset Management
Chief Investment Strategist, EMEA and APAC
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 $1 trillion 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.

$885 Billion in A U M1

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 December 31, 2018. For the Northern Trust Asset Management entities included in the A U M total, please see disclosure at end of this page.