Global economic expansion to continue, albeit at a slower pace
January 03, 2019 — CHICAGO & LONDON–(BUSINESS WIRE)–Despite the global economic slowdown, U.S. monetary policy tightening, and trade tensions introducing further risks to a slowing China, Northern Trust, a leading global asset manager with $1.1 trillion in assets under management, does not foresee a recession in developed markets in 2019. Instead, the firm expects the global economic expansion to continue, albeit at a slower pace, similar to other parts of the world.
Capital Market Assumptions
These predictions are part of Northern Trust’s 2019 Outlook. This report builds off the firm’s long-term Capital Market Assumptions report, a forward looking, but historically aware five-year forecast that guides the firm’s strategic asset allocation recommendations.
In support of the views expressed in the outlook, Northern Trust points to the absence of the typical signs of the end of a business cycle – surging wages and commodity prices. Plus, the prospects for some improvement in China, Europe and Japan remain. China’s stimulus efforts should help its growth to reaccelerate in the second half of the year, providing that trade frictions between it and the U.S. do not significantly increase. The firm also states that accommodating monetary policy should provide a floor for slowing growth in Europe and Japan, making valuations more attractive. However, the firm believes it is very important that the Fed does a better job of signaling to the markets that it understands the impacts its monetary policy tightening has had thus far – and credibly telegraphs a course correction in its interest rate trajectory in 2019.
The 2019 Outlook has led Northern Trust to a risk neutral position on its global asset allocation model for the first time since 2009. This stands in stark difference to its significant overweight to risk assets at the beginning of 2018.
U.S. high-yield bonds forecast @ 9.9%
Its most favored asset class for 2019 is U.S. high yield bonds for which it is forecasting a 9.9% return. The firm believes that concerns regarding high yield credit quality are overblown, as issuers are reporting cycle-high profit margins and cycle-low amounts of leverage. This favorable view has led to an 8% overweight in its global asset allocation model. Its forecast is 3.8% for U.S. investment grade bonds (1% overweight) and 2.4% for cash (2% underweight).
The outlook calls for a slightly higher return from U.S. equities than from ex-U.S. equities, 8.1% vs 7.8% (total neutral position). Emerging markets are expected to trail considerably at 4.8%, as the effect from a 10% rise in the dollar has increased pressures on these markets. The firm has a 3% underweight position, reflecting the expected disproportionate negative impact on emerging market equities if the Fed continues its current monetary policy approach.
“We don’t expect a recession to unfold over the next year in the U.S. , so the current rise in volatility is more likely the symptom of a normal market correction than the start of a bear market,” said Jim McDonald, chief investment strategist, Northern Trust. “In this lower return environment, we like the return prospects for U.S. high-yield bonds, which should benefit from a relatively strong current yield and strong fundamentals. We expect this to reduce downside risk but also offer good potential for upside market participation.”
The full 2019 Outlook is available at here.
Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Capital Market Assumption (CMA) model expected returns do not show actual performance and are for illustrative purposes only. They do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. Stated return expectations may differ from an investor’s actual result. The assumptions, views, techniques and forecasts noted are subject to change without notice.
This material is directed to professional clients only and is not intended for retail clients. For European and Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. This material is provided for informational purposes only. Information is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice.