Capital Market Assumptions
2019 Edition

Five-Year Outlook

Long-term asset class return expectations and forecasts for the years ahead.
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Asset Class Forecasts And Return Expectations
Decent risk asset performance but subdued fixed income returns set the stage for the next five years.
Outlook: SLOW GROWTH TAKES ITS TOLL
We think global equity returns will be below long-term historical averages — a consequence of the slow growth environment.

Our expectation for emerging market equity returns of 6.1% is a material reduction from last year’s forecast and a mere 0.4% return premium to developed markets. Our return forecast for developed markets is 5.7%.
Outlook Rationale
Emerging market equities continue to be negatively affected by a shifting economic model and continued trade tensions; we expect this will also keep valuations low.

Developed market equities will feel the pressure of slow revenue growth, further pressured by some negative profit translation. We also expect valuations to remain within a higher structural range supported by low interest rates and milder economic cycles.
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5.7%
Developed Market Equities Total Return Forecast
6.1%
Emerging Market Equities Total Return Forecast
Equity Building Blocks: Regional Details
Slowing earnings growth and some valuation and margin pressure lead to subdued returns.
Graph: Equity Building Blocks: Regional Detail
Graph: Equity Building Blocks: Regional Detail
Source: Northern Trust Global Asset Allocation.
Outlook: LOW BUT POSITIVE RETURNS PERSIST
Yield curves – globally – continue to test investor expectations.

Our Global Growth Restructuring, Stuckflation 4.0  and Monetary Makeover  themes set the stage for a new global easing cycle leading to our 1.8% interest rate forecast for 10-year U.S. Treasury bonds, 1.0% for 10-year German bonds, and 0.3% for 10-year Japanese government bonds.

We expect a 4.8% global high yield annual return. Lower interest rates will both drive the ongoing search for yield and support asset class fundamentals.
Outlook Rationale
Globally, we expect inflation to remain lower for longer.

We expect steeper yield curves as short-term yields drop, with the U.S. posting higher rates across the curve than most developed markets.

Because we expect interest rates to remain below what is priced into forward curves, we anticipate total returns will continue to outpace starting point yields.
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1.8%
Expected Interest Rate Forecast For 10-Year U.S. Treasury Bonds
4.8%
Expected Annualized Return For Global High Yield
Fixed Income Return Building Blocks
Low fixed income return forecasts are due to low yield starting points.
Graph: Fixed Income Return Building Blocks
Fixed Income Return Building Blocks
Source: Northern Trust Global Asset Allocation, Bloomberg. Coupon return calculated as yield-to-wrost on 6/30/2019
Outlook: INTEREST RATE EXPOSURE HIGHLY VALUED
Our forecasts for natural resources and global real estate include a -0.5% qualitative adjustment, leading to an expected 6.1% and 6.3% return, respectively.

Our 5.8% forecast for global listed infrastructure includes a +0.5% adjustment to capture potential opportunities and return benefits from the renewed search for yield.
Outlook Rationale
Slower global growth, the move away from fossil fuels and potential regulatory headaches temper our outlook for natural resources, while global real estate shows potential as an asset class transitioning to new growth opportunities and providing attractive yields.

Global listed infrastructure should benefit from term exposure, and investors may view the asset class as a purer bond proxy than global real estate, without the fundamental challenges.
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6.1%
Natural Resources Total Return Forecast
6.3%
Global Real Estate Total Return Forecast
5.8%
Global Listed Infrastructure Total Return Forecast
What exactly am I buying?
Real assets have a variety of different risk exposures that must be understood.
Graph: REAL ASSETS
Graph: REAL ASSETS
Source: Northern Trust Global Asset Allocation, Bloomberg. Regression calculating factor exposure run from 12/31/2002 to 3/31/2009.
Outlook: Manager Selection Drives Return
We expect private equity to generate a 2.0% premium over global equities, a conservative forecast in relation to recent results from small to mid-sized managers.

Our 3.7% hedge fund return forecast represents the combination of expected alpha (0.5%) and expected returns from risk exposure (3.2%).
Outlook Rationale
Private equity liquidity premiums and alpha generation have remained solid, especially for managers investing in smaller deal sizes.

Hedge fund alpha has been steadily shrinking over the past 30 years. While our low-single-digit hedge fund return expectation assumes this low average alpha, but we recognize the dispersion across individual strategies. When it comes to hedge funds, the selection process is paramount.
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7.7%
Private Equity Return Forecast
3.7%
Hedge Fund Return Forecast
INCREASING RISK RELIANCE
The average hedge fund has slipped over time, but varies significantly by manager.
HEDGE FUND VS. 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 Global Asset Allocation, Northern Trust Portfolio Construction Desk, Bloomberg. Data from 12/31/2000 to 3/30/2019. Balanced portfolio is 50% MSCI ACWI / 50% Bloomberg Barclays Global Aggregate Index. Past performance does not guarantee future results.
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.
Global Growth Restructuring

A shifting economic model - due to geopolitical and technological developments - will slow growth.

We see the single-digit and below-average returns from equities as global economies muddle through global growth restructuring. Overall, we expect the global economy to experience annualized real growth of 2.2% over the next five years, a decrease from last year's five-year forecast of 2.5%.

Slow Growth Expected To Continue
Our growth expectations call for a continuation of the "muddle through" environment.
Graph: Slow Growth Expected To Continue
Graph: Slow Growth Expected To Continue
Source: Northern Trust Global Asset Allocation, Bloomberg. Data from 3/31/2014 to 3/31/2019.
IRRECONCILABLE DIFFERENCES

The fractious U.S.- China relationship will produce a cascade of geopolitical, economic and market changes.

Diplomatic and economic ties to the U.S. and/or China will drive the alignment decision for other countries, with many of them trying to appease both. We believe this will result in global economic inefficiencies that hamper growth.

Pick a Side
As U.S.- China tensions continue, other countries will have to weigh economic impacts.
Graph: Pick a Side
Graph: Pick a Side
Source: Northern Trust Global Asset Allocation, IMF Direction of Trade Statistics. Updated as of 7/7/2019. Total trade = Exports + Imports.
STUCKFLATION 4.0

Muted growth in global demand and timid policy responses suggest Stuckflation is here to stay.

Global economic demand remains muted as populations continue to age, technology feeds worker insecurity (prompting greater saving) and the global economy restructures. Overall, we expect inflation to remain below central banks’ 2% target for the foreseeable future. See the chart below for country-specific forecasts.

Still Stuckflation
We believe inflation will remain below central banks' 2% target for an extended period.
Graph: Still Stuckflation
Graph: Still Stuckflation
Source: Northern Trust Global Asset Allocation, Bloomberg. Data from 3/31/2014 to 3/31/2019. All regions use core Consumer Price Index except for the US which uses core personal consumption expenditures.
Executive Power Play

Solid growth has pacified power grab concerns, but leaders are at risk of overplaying their hands.

The lesson of this theme is clear. Investors will accept – in fact, support – populist leaders as long as they do not cause undue harm through over-aggressive or anti-growth economic policy. Investors will ignore tough rhetoric and will instead focus on actions.

Populist Scorecard
Populism -- as judged by currency returns -- has been a benign force, except in rare circumstances.
Graph: Populist Scorecard
Graph: Populist Scorecard
Source: Source: Northern Trust Global Asset Allocation, Bloomberg. Currency return in office through 6/30/2019. Elected dates: Modi 5/12/2014; Widodo 7/9/2014; Erdogan 8/10/2014; Orban 4/25/2010; Bolsonaro 10/28/2018. *Returns are annualized and relative to a basket of currencies.
Monetary Makeover

Stuckflation has left central banks without a North Star and seeking relevance as their indepedence is questioned.

Central banks cannot fix today's stuckflation problem without help from policy levers outside of monetary policy. As such, they will increasingly be subservient to political agendas. The degree to which they can act will depend on their ability and willingness to do so.

Could of, would of, should of?
Degree of future easing will be driven by a combination of central banks' ability and willingess to act.
Graph: Could of, would of, should of?
Graph: Could of, would of, should of?
Source: Northern Trust Global Asset Allocation, Bloomberg. Current policy rate data as of 7/31/2019. Current balance sheet data as of 3/31/2019.
Staking Out Climate Risk

Climate risk regulatory impacts will slowly build, but with high dispersion and sporadic embracement.

While climate risk – the threat that transition or physical risks could negatively impact economic growth, inflation and investment returns – has a long lead time, we do not expect it to have a noticable impact on economic growth and inflation over the next five years. However, investment categories with direct exposure to transition risk now require special attention, notably natural resouces and global listed infrastructure.

Preparing for the Storm
Any climate risk impacts over the next five years will be mostly caused by the preparation for it.
Graph: Preparing for the Storm
Graph: Preparing for the Storm
Source: Northern Trust Global Asset Allocation.
More on Our Themes
We analyze the trends and themes driving economic and market activity over the next five years.

Insight

Mixed messages from the Fed

Insight

6 Themes for the Next 5 Years

Opinion

What Investors Can Expect in the Years to Come

CMA Five-Year Outlook | 2019

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.
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.
Contributors
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 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 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.

$975 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 June 30, 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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