Regulating the Boom/Bust Cycle

“Slow Growth Angst” Driving Five-Year Return Forecasts

Market Outlook and Asset Class Return Expectations Released

August 16, 2016 — CHICAGO–(BUSINESS WIRE)–Northern Trust (Nasdaq: NTRS) expects most investments to generate single-digit positive returns over the next five years, predominantly due to slow economic growth and persistent low interest rates.

This Slow Growth Angst – one of six key themes profiled in Northern Trust’s annual five year market outlook – is a key driver behind the company’s return forecasts for global investors of 5.8 percent for global equities and 2.1 percent for investment-grade bonds.

“While we expect markets may be volatile at times, we remain convinced the global economy is in a narrow and slow growth channel,” said Northern Trust Chief Investment Strategist Jim McDonald. “Current regulatory and fiscal policies have greatly restricted the boom-bust cycles and, although the risk of a recession increases, if one does materialize it should be shallow due to a lack of economic excesses and financial system stability.”

Negative on bonds

Despite these subdued, yet positive, projections, Northern Trust believes the three-month German Bonds and Japanese Government Bonds will turn in negative returns during the next five years.

“Developed economies overall will continue their slow pace, expecting annual real economic growth of 1.4 percent over the next five years, and the outlook for emerging economies remains similarly subdued,” said Wayne Bowers, chief investment officer for Northern Trust Asset Management in Europe, Middle East and Africa and Asia-Pacific. “Ultimately, while concerns over slow growth are further impeding global growth, investors need to resist becoming bearish during market weakness or bullish when the economy appears strong and instead scrutinize any future dramatic swings – positive or negative.”

In addition to the theme of “slow growth angst,” Northern Trust has identified five more themes expected to shape the global markets over the next five years including:

  • Stuckflation
    With supply easily matching slow-growing demand, inflation remains “stuck”
  • Market cycles in a cycle-less economy
    Current regulatory and fiscal policies have significantly reduced the odds of a boom-bust cycle
  • Technological turbulence
    Populist-influenced politicians’ view of technology will create a bumpy path for adoption
  • Costs of ultra-low rates
    The costs of ultra-low rates may now outweigh the benefits, but central bankers may have no choice except to continue
  • Populist roulette
    The rise of populism in response to voter dissatisfaction leaves markets unsure of what to expect from the political arena

These themes, combined with a historical analysis of financial market return drivers and asset class relationships, form the basis for asset allocation recommendations for Northern Trust’s global institutional and wealth management clients.

investors need to resist becoming bearish during market weakness or bullish when the economy appears strong

Conclusions and five-year return forecasts for asset classes in the report include:

  • Fixed income: Cash returns are expected to be low to negative as monetary accommodation is extended. Fixed income returns are hobbled by a low-yield starting point, but low-yield continuation supports prices. Some pressures on fundamentals can be offset by demand for yield, supporting credit.
  • Equities: Developed-market equity returns should be modest due to slow global growth, but low inflation and low interest rates will support profit margins and ease valuation contraction. A better emerging marketing revenue outlook is slightly offset by earnings dilution.
  • Real Assets: Natural resource returns benefit from a supply response to lower prices. Global real estate will face demand challenges, but returns will be supported by a diversified set of risk exposures. Global listed infrastructure expected to remain a highly-valued “bond market proxy.”
  • Alternatives: While varying by strategy, the return of the “average” hedge fund will be hurt by lower risk exposure returns and lower alpha, magnifying the importance of manager selection. Private equity should see a slight moderation in its illiquidity premium as asset class interest grows.

Detailed return forecasts organized by asset class and region are developed by Northern Trust’s Capital Market Assumptions Working Group, composed of senior investment professionals from across the global organization.

The group combines empirical research with a forward-looking, historically aware analytical approach. Northern Trust also identifies specific risks that are combined with other portfolio construction tools to annually review and update recommended strategic asset allocations.




Northern Trust Asset Management is a leading global asset management firm serving institutional and individual investors in 29 countries, with $906 billion in assets under management as of June 30, 2016. Northern Trust Asset Management’s robust investment capabilities span all markets and asset classes, from passive and risk-factor to fundamental active and multi-manager strategies, delivered in multiple vehicles. For more information, please visit our website or follow us on Twitter @NTInvest.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, 50 South Capital Advisors, LLC, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, and affluent families and individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States in 19 states and Washington, D.C., and 22 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2016, Northern Trust had assets under custody of US$6.4 trillion, and assets under management of US$906 billion. For more than 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit or follow us on Twitter @NorthernTrust.
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