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

About Northern Trust Asset Management

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. 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.

This report is provided for informational purposes only and 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. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

Past performance is no guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by Northern Trust. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any advisory fees, transaction costs or expenses. It is not possible to invest directly in any index. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise.

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].

If presented, hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the benefit of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over- compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of Northern Trust.

Model expected returns do not show actual performance. Model expected returns are based on IPC Forecasted Returns and reflect Northern Trust's Investment Policy Committee's (IPC) forward-looking annual capital market assumptions. The Capital Market Assumptions Working Group (CMAWG), a subset of IPC members, publishes its assumptions as a white paper report. Forecasted returns are for average annual returns (geometric basis). Five year forecasts are developed annually; most recent forecasts released [7/18/2016]. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment strategy. Model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only. References to expected returns are not promises or even estimates of actual returns an investor may achieve. The assumptions, views, techniques and estimates set out are provided for illustrative purposes only. Forecasts of financial market trends that are based on current market conditions constitute CMAWG judgment and are subject to change without notice. 'Expected' or 'alpha' return estimates are subject to uncertainty and error. The ability to achieve similar outcomes is subject to risk factors over which Northern Trust may have no or limited control.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors Inc., 50 South Capital Advisors, LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

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