Northern Trust’s Five-Year Investment Outlook: Amid Steady Global Growth, Stocks Remain Attractive Despite Elevated Valuations; No Bond Bubble

The global economy will experience 2.4% real average annualized growth over the next five years, according to Northern Trust’s Capital Market Assumptions five-year investment outlook, a report that informs the investment decisions for the $1 trillion managed by the firm. While acknowledging that equity valuations are high in developed markets, the forecast projects that steady economic growth along with low inflation will keep stocks attractive since these conditions are conducive to strong earnings and support high valuations. The highest regional average annualized return is forecast for emerging markets, at 8.4%, followed by: 7.2% for Europe; 6.6% for the U.K.; 6.0% for Japan; and 5.9% for the U.S.

The outlook does not foresee a bond bubble given the firm’s expectation that interest rates will remain low and increase gradually and modestly, as well as less than general market expectations reported by Bloomberg. Northern Trust expects rates on 3-month bonds from the U.S., Europe, Japan, and the U.K., to increase to a range of 0.0% (Japan) to 2.1% (U.S.). The firm’s 10-year bond expectation ranges from 0.5% (Japan) to 3.0% (U.S.).

The complete forecast is based on six investment themes identified by Northern Trust. One of them, "Waiting for Monetary Godot,” refers to a widely held belief among investors that monetary policy will normalize as global growth remains subdued and inflation stays below central bank targets. However, Northern Trust finds this outcome highly unlikely. "We may never see central banks return to traditional policies and don’t expect a return to pre-financial crisis levels over our forecast horizon,” said Northern Trust Chief Investment Officer Bob Browne. "A successful unwinding of huge central bank balance sheets, which is likely to remain larger than historical levels, will be the focus.”

In citing Brexit and the U.S. presidential election as examples of "populist earthquakes” cited in its "Popular Catharsis” theme, the forecast notes that such events will not derail another of the six themes – "Entrenched Growth” over the next five years. "The rise of global populism has not dramatically changed the global economic outlook,” Northern Trust Chief Investment Strategist Jim McDonald said. "During this political and economic transition investors will show patience and reward those leaders who drive change.”

Wayne Bowers, CIO and CEO for Northern Trust Asset Management in Europe, Middle East and Africa said the report’s theme of "Entrenched (Global) Growth” and relative stability "is based on demand being constrained by natural regulators such as high debt burdens, aging developed market populations and transitioning emerging market economies. These factors, along with regulatory relief and persistent low inflation, will continue to allow easy monetary policy, and stop global markets from overheating.”

Northern Trust’s capital market assumptions are the firm’s forward-looking, historically aware forecasts for global economic activity and financial market returns. These forecasts drive its five-year asset class return expectations and asset allocation decisions.

Developed by the firm’s top investment professionals, this framework serves as the foundation for the solutions the firm provides to professional and individual investors worldwide.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, 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, 2017, Northern Trust had assets under custody of US$7.4 trillion, and assets under management of US$1.03 trillion. For more than 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit northerntrust.com or follow us on Twitter @NorthernTrust.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/disclosures.

About Northern Trust Asset Management

Northern Trust Asset Management is a leading global asset management firm serving institutional and individual investors in 29 countries. Our robust investment capabilities span all markets and asset classes, from passive and risk-factor to fundamental active, multi-asset class and multi-manager strategies, delivered in multiple vehicles. As of June 30, 2017, Northern Trust has $1.03 trillion in total assets under management. For more information, please visit our website or follow us on Twitter @NTInvest.

Northern Trust Asset Management comprises Northern Trust Investments, Inc., Northern Trust Global Investments Limited, 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.

IMPORTANT INFORMATION. This material is directed to eligible counterparties and professional clients only and should not be relied upon by retail investors. The information in this material reflects prevailing market conditions and our judgment as of this date, which are subject to change. Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but the accuracy, completeness and interpretation cannot be guaranteed. The information does not constitute investment advice or a recommendation to buy or sell any security and is subject to change without notice.

For important information relating to hypothetical returns and model forecasts please refer to the disclosure page

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