Global Equity

Reimagining Capitalism

How the pandemic has informed new thinking on global economic growth

by Jim McDonald

Mr. McDonald is Chief Investment Strategist for Northern Trust, which serves intermediaries, institutions, and high net worth individuals in managing $1.3 trillion across mutual funds, ETFs, separately managed accounts, model portfolios, and other investment vehicles. Visit

Every year, we publish our Capital Market Assumptions Five-Year Outlook, which includes six global investment themes we use to identify the trends we see affecting the markets and economy over the next five years.

Over the past several years, we’ve produced five-year forecasted portfolio returns that fell within half a percentage point of the actual five-year return. We believe our accuracy speaks very well to the value of multi-asset investing, as diversification over a wide array of assets helps smooth out any individual asset class forecasts that are significantly off target.

Our capital market assumptions inform our asset allocation decisions for $1 trillion in assets under management across mutual funds, ETFs, separately managed accounts, model portfolios, and other investment vehicles used by financial advisors and institutional investors worldwide. Assets span the globe and run the gamut from various classes of equities, bonds and alternatives.

So, what are the investment themes that’ve identified this year?

Retooling Global Growth

Companies will prioritize stability over profitability by re-routing their supply chains, moving production inside their home countries, and building healthier balance sheets. U.S.-China tensions have resurfaced and technology utilization is increasing by C-suites and consumers alike. Working from home has been embraced and e-commerce delivery has taken another big step forward because of the pandemic, which fueled the loss of millions of brick-and-mortar retail jobs. Many of those jobs will never come back.

The ramifications will last beyond the pandemic. Industries must “retool” to stabilize business models by moving production out of China and closer to home. This both reduces dependence on China and ensures access to necessary supplies. Onshoring means increased automation, causing further job losses on a net basis. Finally, the fiscal stimulus designed to numb the economic pain has increased government debt by trillions of dollars. All of this will temper long-term global economic growth. Hence, our expectation that the global economy will experience annualized real growth of 2.6% over the next five years.

Massive Monetary Toolkit

The controversial Modern Monetary Theory (MMT) — which advocates for greater coordination between monetary and fiscal policy — is, in reality, already being applied, especially in reaction to the pandemic. This evolution has given central banks (recently viewed as ineffective) a big new toolkit. So using the same abbreviation, we call it Massive Monetary Toolkit.
In our five-year outlook last year, we discussed how we expect monetary policy to form a closer link with fiscal policy to deal with the pattern of low inflation that we call Stuckflation, another theme of ours which is now in its fourth consecutive year. The evolution of monetary policy is being accelerated by the pandemic. While not technically coordinated, the simultaneous reduction of interest rates to zero and a tremendous increase in central banks’ balance sheets has allowed government deficit financing at massive size and at minimal interest costs.

Many were worried that, with interest rates near/at zero, central banks would not have the tools to fend off the next recession. However, when better coordinated with fiscal policy, those fears have proven unfounded. In fact, central banks have massive toolkits driven by their ability to purchase securities through newly created money. Balance sheets are staying big and, in many cases, growing even bigger. Investors anticipating any return to “normal” monetary policy may need to give up on the wait.

Stuckflation Tested

Inflation faces a test from many of this year’s themes, but the effects of slow growth, technology and automation will keep inflation at or below central bank targets. In our five-year outlook last year, we wrote that we expected “ongoing inflation disappointment to eventually lead to a coordinated policy (fiscal and monetary) response” that could potentially introduce the threat of inflation — but further down the road. We did not anticipate a global pandemic would spur that coordinated policy response in less than a year’s time.

In response to the pandemic, trillions of dollars of fiscal and monetary stimulus has been pumped into the system. For now, fiscal stimulus has only partially replaced lost economic demand and monetary stimulus has mostly stayed in the financial markets. However, some fear that, once the economy regains traction, all of this money in the system will push inflation beyond investors’ comfort zone. Adding to this concern, we expect companies to prioritize resiliency over efficiency, potentially leading to a higher cost of production. Also, central bankers likely will allow “somewhat higher” inflation to make up for a decade of low inflation.

Low consumer demand will persist for some time as jobs will be slow to return. Further, technology will allow companies to make the shift from a laser focus on efficiency to more stability in their supply chains. However, technology-enabled production has kept prices low, and it will be a while before central banks really understand what they are up against in their fight against Stuckflation.

One World, Two Systems

We think the U.S. and China will learn to live on the same planet with their opposing views on economic policy. Collaboration won’t be absent, but won’t be optimal either — leading to inefficiencies.

It is increasingly apparent that the countries’ differences — from economic to political to social — will go unresolved. As a result, it is unlikely we will ever return to the trading relationship that existed prior to the trade war, regardless of who occupies the White House, although policy under a Biden administration would likely be more assertive than aggressive, with more coordination with traditional allies.

In either case, the U.S.-China interaction will remain the focus — the prevailing world leader vs. the contender. China has four times the population of the U.S., which should allow its economy to continue to outpace U.S. growth if productivity gains can continue among its 1.4 billion citizens. But China trails the U.S. in overall economic might and financial market influence. The U.S. dollar will remain the world’s primary reserve currency throughout our five-year horizon, giving the U.S. an ongoing advantage.

We think the U.S. and China will learn to live on the same planet with their opposing views on economic policy. Collaboration won’t be absent, but won’t be optimal either — leading to inefficiencies. It is increasingly apparent that the countries’ differences — from economic to political to social — will go unresolved...

We do not believe the current feud will move out of the economic realm — the stakes are too high. In fact, we believe tensions will reduce to a constant simmer as an “agree-to-disagree” dynamic takes hold. The biggest loser here will be globalization, which will continue to decline. A new One World, Two Systems dynamic (U.S. capitalism vs. China’s statism) will continue to grow and evolve in a detrimental way. Other countries and multi-national companies will be forced to either pick a side or straddle the middle ground, leading to lost economic opportunity (slowing economic growth) and/or economic inefficiencies.

Reimagining Capitalism

For everyone to believe in (some form of) capitalism, rules alleviating the “winner take all” dynamic must evolve. Business leaders, the ultra-wealthy and politicians representing those left behind will find a way to forge a new capitalism that works better for all.

The pandemic has highlighted flaws in the capitalist economic system itself. Specifically, it has called into question capitalism’s once sacred maxim (first promoted by economist Milton Friedman) that a company’s sole focus should be profit maximization. The premise was that if companies focus on maximizing profits, other societal aims will take care of themselves. But one societal aim — reducing inequality — has only gotten worse over the past 40 years.
The pandemic has exacerbated the divide between the higher and lower-income workers. Of the millions of jobs lost to the pandemic (some temporarily, some permanently), many were low-paying. Also, those in higher-paying jobs are more likely to have the ability to work remotely — and, thus, more likely to still be employed. Only 9% of the bottom quartile of earners can work from home while 62% of top-quartile earners have that ability, according to the U.S. Census Bureau.

Profit-maximizing capitalism worked well for the time it was created. Investment capital was necessary to start businesses (building factories, etc.), which employed vast amounts of workers. Having several companies in each industry benefitted the consumer in the form of price competition. Today’s environment is different. In many cases, no (or very minimal) investment capital is needed to launch companies, which require relatively few employees to keep operations going. For instance, Netflix and Intel have a similar market cap and yet Intel employs over 12 times as many workers — 110,000 vs. 8,600. Meanwhile, the benefit of multiple competitors is less clear. Should Amazon be broken up? Its scale is what enables it to be a low-cost provider. These dynamics create a “winner take all” environment, and certainly do not meet broader societal aims of less income inequality. Shareholder pressure will get C-suites on board, and capitalism will evolve into something that works for all — though possibly at some expense to corporations.

Stay Focused On Climate Risk

The pandemic took focus off climate-related issues, but the risks have not gone away. In some cases, they have intensified. Post-pandemic economic rebuilding will force leaders to re-engage with climate risk — a headwind for some industries but a tailwind for others.

Even central banks are getting into the discussion. The European Central Bank has started to address how it will include climate risk in its monetary policy, viewing climate risk as integral to the economic outlook.

The biggest threat for financial markets is with equity returns as investors anticipate the future negative impact of climate change. Particularly vulnerable are natural resource and emerging market stocks. Relatively fragile economies could be especially sensitive to climate-related regulation as they are still in early stages of maturation, which generally comes with higher carbon emissions. Investors likely will start to look at climate risk with more urgency as the pandemic has made investors more sensitive to how large non-financial events can hurt returns.

Investors should therefore aim to be ahead of the repricing that is likely to occur. We believe one way to do this is to focus on the portfolio construction process. Using environmental criteria in the evaluation process is one way investors can help mitigate long-term climate risks that are difficult to analyze and quantify. Preparing in this manner avoids performing what might ultimately be a fruitless task of attempting to map out every global warming scenario and all associated risks.

Themes Drive Forecasts

We are calling for 2.6% annualized global growth over the next five years, with rates remaining low and average annualized inflation of 2.0% for the U.S. We foresee global average annualized equity returns in the 3.8-8.2% range depending on region, with the U.S. among the lowest at 4.7%. In fixed income, except for a 5.6% return expectation for global high yield, including 5.5% for the U.S., we think returns will be mainly in the 1% – 3% range. Emerging market debt is an exception at 4.5%.

All told, we expect the next five years to be quite challenging for investors. Download our Capital Market Assumptions Five-Year Outlook for our complete forecasts.





 The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc.  The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.
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